INCOME  TAX 
LAW  AND   ACCOUNTING 


BY 

GODFREY  N.  NELSON 

Certified  Public  Accountant,  State  of  New  York 
Member  the  New  York  Bar 


PUBLISHED  BY 
GODFREY    N.   NELSON 

52  BROADWAY,  NEW  YORK 


COPYRIGHT,  1917 

BY 
GODFREY  N.  NELSON 


PREFACE 

Since  the  enactment  of  the  Corporation  Excise  Tax  of  1909, 
and  the  Federal  Income  Tax  Law,  applicable  to  both  individuals 
and  corporations,  effective  March  1,  1913,  the  writer  has  pre- 
pared, and  advised  with  regard  to,  many  income  tax  returns  of 
corporations  and  individuals.  The  preparation  of  returns  almost 
invariably  necessitated  the  analysis  and  subdivision  of  book  ac- 
counts as  commonly  kept  in  order  to  conform  them  to  the 
classification  prescribed  by  these  laws.  To  obviate  the  neces- 
sity of  analyzing  and  rearranging  accounts  and  to  facilitate  the 
preparation  of  returns  was  the  first  thought  that  actuated  the 
writing  of  this  book.  To  make  it  more  helpful  there  have  been 
included  rulings  of  the  Treasury  Department  and  court  decisions 
on  the  most  important  items  of  income  and  expenses. 

The  writer  makes  no  pretence  at  having  produced  a  law 
book  and  at  no  time  had  that  aim  in  view.  This  is  intended 
merely  to  serve  the  purpose  of  a  practical  guide  to  those  who, 
either  for  themselves  or  others,  are  called  upon  to  prepare 
returns.  Statements  contained  herein  are  predicated :  first,  upon 
the  Income  Tax  Law  enacted  September  8,  1916,  which  was 
retroactive  and  took  effect  as  of  January  1,  1916;  second,  upon 
rulings  by  the  Treasury  Department  thereon;  and  third,  upon 
such  rulings  and  court  decisions  under  the  Excise  Tax  of  1909 
and  the  Income  Tax  Law  of  1913,  which  are  consistent  and 
not  in  conflict  with  the  requirements  of  the  present  law. 

An  expression  of  gratitude  is  due  to  various  officials  and 
officers  of  Internal  Revenue  of  the  Treasury  Department  at 
Washington  and  New  York  for  the  courtesies  shown  to  the 
writer  in  matters  submitted  to  them,  but  this  acknowledgment 
should  not  be  construed  as  an  endorsement  by  them  of  the 
contents  of  this  book.  The  writer  also  acknowledges  the  help- 
fulness of  the  Income  Tax  Service  of  the  Corporation  Trust 
Company,  the  index  to  which  was  especially  useful  as  a  ready 
reference  to  Treasury  Decisions.  Mention  should  also  be  made 
of  Mr.  Henry  Campbell  Black's  treatise  on  the  law  of  "  Income 
Taxation  "  under  Federal  and  State  laws,  to  which  the  writer  has 
referred. 

The  arrangement  of  subjects  is  not  co-ordinate  throughout, 
but  the  order  of  the  statute  and  the  returns  of  net  income  have 
been  followed  as  nearly  as  practicable. 

GODFREY  N.  NELSON. 
New  York  City, 

December  16th,  1916. 

357347 


TABLE  OF  CONTENTS 


Chap- 
ter Pages 
I.            INCOME  TAX  AS  APPLIED  TO  INDIVIDUALS 

I.  General  Provisions :  Who  is  subject  to  tax — 
Division  and  Rates  of  Tax — Normal — Addi- 
tional—Tax Year— Etc 9-10 

II.  Returns  of  Individuals :  Return,  defined — 
Who  is  required  to  make  return — Husband 
and  wife — Fiduciaries — Agent  under  power 
of  attorney — Heirs  and  legatees — Citizen  re- 
siding abroad — Return  by  agent — To  whom 
return  is  made — Due  date  of  filing — Exten- 
sion of  time — Penalty,  failure  to  file — 
When  Internal  Revenue  Officers  may  make 
return — Penalty,  false  return — Due  date  of 
payment  of  tax — Penalty,  delayed  payment 
— Return  of  nonresident  alien — Residence, 
defined — Claims  for  refund  of  taxes — 
Statute  of  limitations— Etc 10-16 

III.  Income    of    Individuals :      Income,    defined — 

Duty  to  ascertain  share,  undivided  surplus 
of  corporation — Dividends,  insurance  com- 
panies— Annuities — Damages,  inj  uries — Ac- 
cident insurance — Dividends,  generally — 
Dividends  earned  prior  to  March  1,  1913 — 
Stock  dividends — Cash  value,  stock  divi- 
dends—Sales of  "  rights  "—Exchange  of 
stock — Return  of  capital  to  stockholders — 
Interest  on  Government  obligations — Income 
of  estates — Salary  paid  by  stock — Bonuses 
— Money  equivalent — Rental  value — "  In 
trade" — When  professional  fees  are  return- 
able— Promissory  notes — Property  acquired 
by  gift — Income  of  clergyman — Insurance 
agents — Trustees — Pensions — Profit,  sales  of 
capital  assets — Fair  market  price  of  securi- 
ties— "  Fair  market  price,"  generally — Etc. . .  16-24 

IV.  Deductions   allowed  to   Individuals :     Specific 

exemptions — Individuals,  unmarried,  mar- 
ried, head  of  family,  nonresident  alien — 
Estates — Head  of  family,  defined — Ward — 
Cestui  que  trust — Necessary  expenses — In- 


4  TABLE  OF    CONTENTS 

Chap- 
ter Pages 
I. 

terest — Taxes — Local  assessments — Income 
tax  paid— Water  rates— Losses— "  Not  in 
trade" — Loss,  defined — "In  trade,"  defined 
— Bad  debts — Depreciation — Depletion — Gas 
and  oil  wells,  mines — Improvements — Re- 
storing property — Replaced  buildings — Dam- 
-  age  suits — Judgments — Insurance  reserve — 
Premiums — Accrued  interest  on  bonds — 
Commissions  paid  real  estate  agent — Cam- 
paign expenses — Stock  assessments — Ali- 
mony— Living  expenses — Nonresident  aliens 

—Etc 24-31 

V.  Tax  withheld  at  source:  Individuals,  corpo- 
rations and  partnerships — Normal  tax — In- 
terest, bonds  and  mortgages  of  corpora- 
tions— License  required  by  collectors — Tax- 
free  bonds — Scrip  certificates — Commercial 
paper  of  corporations — Compulsory  deduc- 
tions— Specific  exemption,  how  obtained — 
Penalty,  false  representation — Deductions 
and  refund  tax  withheld  in  excess — Rentals 
— Bank  interest — Real  estate  agent — Travel- 
ing expenses  of  salesmen — Commissions  paid 
salesmen — Profit  sharing  bonuses — Indem- 
nity to  withholder— Return  of  tax  withheld 
— Nonresident  aliens — Exemption  from  with- 
withholding  on  income  of  nonresident  alien 

corporations — Alien   individuals — Etc 31-39 

VI.  Farms  and  farmers :  Income  from  farms — 
Prepaid  farm  expenses — Shares — Losses — 
Live  stock — Condemned  live  stock — Farm 
machinery — Depreciation — Books  of  account 
— Farm  maintained  only  for  recreation — 
Etc 39-41 

II.  INCOME  TAX  AS  APPLIED  TO  PARTNERSHIPS 

VII.  General  partnerships:  Returns  by  partners — 
Partnerships— Income,  when  accrued— With- 
holding of  tax — Dividends  to  partnership — 
Expenses — Life  insurance  premiums — Etc...  42-43 
VIII.  Limited  partnerships :  Form  of  return  required 
— "Limited  partnership,"  defined — Distribu- 
tion of  profits— Etc 43-44 


TABLE  OF   CONTENTS  5 

Chap- 
ter Pages 
III.            INCOME  TAX  AS  APPLIED  TO  CORPORATIONS 

IX.  General  Provisions  :  Domestic  corporations — 
Foreign  corporations — Rate — Tax  year — 
Specific  exemption — Foreign  income — Etc...  45-46 
X.  Returns  of  corporations :  Form  of  return — 
Domestic  corporations — Foreign  corpora- 
tions— Calendar  year — Due  date — When  last 
filing  day  falls  on  Sunday  or  Holiday— Re- 
turn, by  whom  executed — When  tax  pay- 
able—Penalty, delayed  payment— Fiscal 
year  of  corporation,  illustration — When  tax 
payable,  fiscal  year — Extension  of  time — 
Penalty,  failure  to  file— Penalty,  false, 
fraudulent  return — Penalty,  refusal,  neglect 
— Return  prepared  by  Commissioner  of  In- 
ternal Revenue — Second  assessment — Pub- 
licity— Apportioning  income  1916 — Incom- 
pletely organized  corporations — Foreign 
branches  —  Holding  companies  —  Subsidiary 
companies — Receivers  of  corporations — In- 
terstate commerce  corporations — Books  of 

account — Etc 46-53 

XI.  Exempt  organizations :  List  of  all  classes  of 
corporations  and  organizations  exempt  from 
tax — Doubtful  as  to  exemption — Withhold- 
ing tax  at  source — Foreign  organizations — 

Close  Corporations — Etc 53-56 

XII.  Income  of  corporations:  Net  income — Gross 
income  of  corporations,  manufacturing, 
mercantile,  miscellaneous,  centracting,  in- 
surance companies,  mutual  companies — 
Gross  income  all  sources — Dividends  re- 
ceived— Cash — Property — Sales  of  capital 
assets — Property  acquired  prior  to  March 
1,  1913 — Interest,  sinking  funds — Real 
estate  development  corporation — Instalment 
businesses — Assessments,  paid-up  capital 
stock — Premium,  sale  of  capital  stock — Etc.  56-61 
XIII.  Deductions  allowed  to  corporations :  Deduc- 
tions, generally — Losses — When  deduc- 
tible— Property  acquired  before  March  1, 
1913  —  Depreciation  —  Depletion  — Timber 


O  TABLE  OF    CONTENTS 

Chap- 
ter Pages 
III. 

lands — Bad  debts — Reserve,  bad  debts — Re- 
serve, insurance  companies — Contingent  and 
secret  reserves — Suspense  items — Sinking 
funds — Reserve,  discounts  on  sales — Inter- 
est, generally — Interest,  indebtedness  se- 
cured by  collateral — Interest,  preferred 
stock— Bonds — Amortization  of  bonds — 
Premium  on  bonds — Organization  expense — 
Local  benefits — Bonuses,  gratuities — Sal- 
aries, National  guardsmen — Pensions — De- 
falcation, embezzlement — Foreign  corpora- 
tions—Etc   61-67 

IV.  DEPRECIATION 

Deductions  from  income — Methods  of  com- 
puting —  Reserves  —  Diverting  reserves — 
Rates  —  Buildings  —  Building  repairs — Ad- 
ditions, betterments — Leased  property — 
Buildings  erected  by  tenant — Furniture  and 
Fixtures — Dwellings — Farm  buildings — De- 
pletion— Machinery — General  and  special 
machinery — Boilers,  engines — Repairs  and 
replacements — Shafting — Tools — Miscellane- 
ous equipment  enumerated — Laundry  equip- 
ment —  Patterns  —  Patents  —  Copyrights — 
Auto  trucks — Horses,  stable  equipment — 
Good  will — Stocks  and  bonds — Trademarks 
—Brands— Stock  on  hand 68-85 

V.  BOOKKEEPING  SUGGESTIONS — PREPARATION  OF  IN- 

COME TAX  RETURNS  OF  CORPORATIONS 
Methods  of  bookkeeping — Books  of  account, 
best  guide — Examination  of  books  by  Inter- 
nal Revenue  Officers — Accruals,  prepayments 
— Distribution  of  accounts — Sales — Return 
sales — Allowances — Discounts  allowed — Dis- 
counts received  —  Rebates  —  Purchases — 
Freight  on  sales  and  purchases — Inventories 
— Rentals  —  Royalties  —  Interest  received  — 
Interest  paid — "  Debenture  bonds  " — Divi- 
dends received  —  Sundry  income  —  Labor, 
wages  and  commissions — Fuel,  light  and 
power — Ordinary  repairs — Salaries  of  offi- 


TABLE  OF    CONTENTS  7 

Chap- 
ter Pages 
V. 

cers — Miscellaneous  accounts — Customs,  du- 
ties— Withholding  tax — Report  of  withhold- 
ing corporation  —  Bad  debts  —  Prevalent 
causes  justifying  charging  off— Loss  by  fire 
—Sales,  capital  assets— Depreciation  and 
depletion — Taxes — Treatment  of  taxes  with- 
held on  books  of  recipient  of  income  and 
payer  of  income — Capital  stock — Interest 
bearing  indebtedness— Merchandise  account 
— Profit  and  loss  account — Dividends  de- 
clared— Reconciliation  of  return  with  books 
— Manufacturing  corporation  operating  cost- 
system— Etc "86-111 

VI.  INFORMATION  REQUIRED  TO  PREPARE  RETURN  OF 

NET  INCOME  OF  MERCANTILE  CORPORATION 
Limitation    of    accruals — Tabulation    showing 
wherein  each  item  should  be  entered  in  the 
return  proper  and  supplementary  statement 
—Etc 112-118 

VII.  PREPARATION  OF  INDIVIDUAL  INCOME  TAX  RETURN 

Method  of  bookkeeping — Income  tax  with- 
held at  source — Separate  returns,  husband 
and  wife — Return  of  merchant — Illustration, 
method  of  computing  gross  profit — Interest 
received,  classified — Salaries,  wages  and 
commissions — Professions — Business,  trade, 
commerce  —  Rents  —  Fiduciaries  —  Partner- 
ship profits — Royalties — Sundry  sources — 
Dividends  —  Necessary  expenses  —  Interest 
paid— Taxes — Losses — "  Losses  in  trade  " — 
— Bad  debts — Depreciation — Depletion — Il- 
lustration, method  of  computing  normal  and 
additional  tax— Etc 119-128 

APPENDIX  A     FEDERAL  INCOME  TAX   LAW  ENACTED  SEP- 
TEMBER 8,  1916 129-160 

APPENDIX  B    FEDERAL  CAPITAL  STOCK  TAX  LAW  ENACTED 

SEPTEMBER  8,  1916,  AND  TREASURY  RULINGS  THEREON.  161-171 

APPENDIX  C    LIST  OF  INTERNAL  REVENUE  COLLECTORS  IN 

THE  UNITED  STATES 172-176 

INDEX  ..177-205 


INCOME  TAX— LAW  AND  ACCOUNTING 


Amended 
Law 


Who  is 
Subject  to 
Tax 


Division 
of  Tax 


CHAPTER  I 
INCOME  TAX  AS  APPLIED  TO  INDIVIDUALS 

1.     GENERAL  PROVISIONS 

The  Federal  Income  Tax  Law  was  amended  by  "  an 
act  to  increase  the  revenue  and  for  other  purposes," 
enacted  September  8,  1916. 

Every  citizen  of  the  United  States,  irrespective  of  his 
place  of  residence,  at  home  or  abroad,  and  every  resi- 
dent of  the  United  States,  shall  pay  the  tax  upon  his 
entire  net  income  received  from  all  sources,  in  the  pre- 
ceding calendar  year;  and  every  non-resident  alien  shall 
pay  the  tax  upon  his  entire  net  income  received  from  all 
sources  within  the  United  States;  less  the  credits  and 
exemptions  to  which  such  persons  shall,  respectively,  be 
entitled  under  the  law. 

The  tax  on  the  income  of  individuals  is  composed  of 
two  parts,  designated  the  "  normal  tax  "  and  the  "  addi- 
tional tax." 


Normal  Tax        The  normal  tax  imposes  the  fixed  annual  rate  of  2  per 
cent,  upon  the  entire  net  income  of  individuals,  except, 

1.  Income  derived  from  dividends  on  the  capital  stock 
or  net  earnings  of  corporations,  joint  stock  companies 
or  associations,  or  insurance  companies,  on  which  the 
normal  tax  is  paid  by  such  companies  or  associations. 

2.  The  personal  exemption  of  $3,000  per  annum  to 
the  unmarried  person  and  $1,000  additional  to  the  head 
of  a  family,  or  to  a  married  man  with  a  wife  living  with 
him,  or  to  a  married  woman  with  a  husband  living  with 
her,  provided,  however,  that  only  $4,000  shall  be  allowed 
to  both  husband  and  wife  from  their  aggregate  income. 


10 


INCOME   TAX — LAW   AND   ACCOUNTING 


The  additional  tax  is  imposed  upon  all  net  income  of 
the  individual,  including  that  received  as  dividends  on 
capital  stock  or  from  net  earnings  of  corporations,  joint 
stock  companies  or  associations,  or  insurance  companies, 
in  excess  of  $20,000,  upon  the  progressive  scale,  as  fol- 
lows: 

From       $20,000  to     $40,000 1    per  cent. 

40,000  to       60,000 2      "       " 

60,000  to       80,000 3      "       " 

80,000  to     100,000 4      "       " 

100,000  to     150,000 5      "       " 

150,000  to     200,000 6      "       " 

200,000  to     250,000 7      "       " 

250,000  to     300,000 8      "       " 

300,000  to     500,000 9      "       " 

500,000  to  1,000,000 10      "       " 

1,000,000  to  1,500,000 11      "       " 

1,500,000  to  2,000,000 12      "       " 

In  Excess  of  $2,000,000 13      "       " 

The  calendar  year  comprises  the  tax  year. 

The  foregoing  tax  rates,  normal  and  additional,  apply 
to  the  entire  net  taxable  income  received  by  every  person 
in  the  calendar  year  1916,  and  every  calendar  year  there- 
after. 

II.     RETURNS  OF  INDIVIDUALS. 

A  "  return  "  is  the  statement  or  report  of  income  upon 
which  the  Government  bases  the  assessment  of  income 
tax.  The  return  required  of  individuals  is  known  as 
Form  1040,  Revised. 

Every  person  having  received  an  income,  irrespective 
of  source,  of  $3,000  or  more,  within  the  year,  must  make 
and  file  a  return.  The  fact  that  a  person's  employer 
withholds  the  tax  and  pays  the  same  does  not  relieve  the 
employee  of  making  an  individual  return.  The  same  is 
true  of  persons  whose  entire  income  is  in  the  form  of 
dividends.  Or,  if  the  combined  income  of  a  person,  in- 
cluding salary  and  dividends,  or  any  other  combination 
of  sources,  aggregates  $3,000  or  more  within  the  year, 


RETURNS   OF   INDIVIDUALS  11 

the  recipient  thereof  must  make  and  file  a  return.  Per- 
sons receiving  less  than  $3,000  in  the  year  are  not  re- 
quired to  make  a  return  unless  especially  demanded  by 
the  Commissioner  of  Internal  Revenue. 

No  Obligation      There  is  no  obligation  upon  the  part  of  the  Govern- 
Qovernment    m^nt  to  seek  out  those  who  are  taxable  or  to  send  the 


to  Send  Out  necessary  blank  to  those  of  whom  a  return  is  required. 
It  is  incumbent  upon  the  individual  to  obtain  the  blank 
from  the  Collector  of  his  district  if  he  is  required,  under 
the  law,  to  file  a  return. 

Return  by  Income  of  the  husband  and  wife,  if  not  living  apart, 

Husband  and  ,  . 

Wife  may  be  returned  in  one  report. 


If  the  aggregate  income  of  both  husband  and  wife  ex- 
ceeds $4,000  a  return  of  their  combined  incomes  must 
be  made,  even  though  neither  one  separately  has  an  in- 
come of  $3,000  per  annum.  When  separate  returns  are 
made  the  exemption  of  $4,000  may  be  prorated  by  agree- 
ment between  them  but  the  aggregate  exemption  de- 
ducted shall  not  exceed  $4,000.  When  the  income  of 
husband  and  wife  exceeds  $20,000  per  annum,  they  should 
make  separate  returns  because  the  additional  or  surtax 
is  computed  on  the  separate  income  of  each  individual. 

Returns  of  All  persons  and  corporations  acting  in  a  fiduciary 
Fiduciaries  capacity,  such  as  guardians,  trustees,  executors,  admini- 
strators, receivers,  conservators,  must  make  and  render 
a  return  of  net  income  of  the  person,  trust  or  estate  for 
whom  or  which  they  act  (Form  1041,  Revised)  and  are 
subject  to  all  the  provisions  in  regard  thereto  that  apply 
to  individuals.  Where  there  is  more  than  one  person  or 
corporation  acting  in  a  fiduciary  capacity,  the  return  of 
one  is  sufficient,  provided  that  such  return  is  a  complete 
report  upon  all  income  received. 

An  executor  or  administrator  is  required  to  make  a 
return  of  the  income  received  by  the  decedent  for  the 
period  from  the  first  day  of  January  to  the  date  of  the 
decedent's  death.  (Form  1040  Revised.) 


12  INCOME   TAX — LAW   AND   ACCOUNTING 

Agent  Acting  A  person  acting  under  a  power  of  attorney  is  not  con- 
Under  Power  strued  to  be  a  fiduciary  and  is  not  required  to  render 
of  Attorney  r  *'t 

return  ot  receipts  and  disbursements  in  his  representative 

capacity.  Should  he,  however,  have  title  to  property, 
from  which  there  is  income,  irrespective  of  actual  own- 
ership, he  must  make  return  of  such  income.  A  prop- 
erty owner  cannot  conceal  his  income  by  assigning  it  to 
a  representative  for  the  purpose  of  escaping  the  tax. 
Where  there  is  a  transfer  of  vested  interest  in  property 
the  transferee  must  include  in  his  return  not  only  such 
part  of  income  as  has  been  paid  to  the  principal  but  the 
undistributed  portion  as  well. 

Income  to  Where  the  beneficiaries  receive  regular  incomes  from 

an  estate,  the  respective  shares  to  be  distributed  shall 
be  the  amount  returnable  and  subject  to  the  tax. 

Form  of  The  return  of  individuals  must  be  made  under  oath 

Return  on  tne  form   (1Q4Q  Revised)   provided  by  the  Govern- 

ment. 

Return  by  If,  by  reason  of  illness,  absence  or  non-residence,  a 

Agent  person  is  unable  to  render  a  return  in  due  time,  then 

the  return  may  be  made  by  an  agent  having  knowledge 
of  the  affairs  of  such  person  whose  return  he  makes. 
Such  agent  is  subject  to  all  penalties  provided  for  erro- 
neous, false  or  fraudulent  returns. 

Citizens  The  fact  that  an  American  citizen  resides  abroad  and 

Residing         pays  an  income  tax  to  the  country  wherein  he  resides. 

Abroad  Must  *   J 

Make  Return  does  not  excuse  him  from  paying  an  income  tax  in  the 

United  States.  He  is  required  to  make  a  return  of  all 
his  income  to  the  Collector  in  the  district  of  his  legal 
residence  or  principal  place  of  business  in  the  United 
States.  If  a  citizen,  residing  abroad,  has  no  residence 
or  place  of  business  in  the  United  States,  his  return 
should  be  made  to  the  Collector  of  Internal  Revenue, 
Baltimore,  Maryland. 


KETUKNS    OF    INDIVIDUALS 


13 


ReturnT1  A  tfUC  and  accurate  return  of  net  income  must  be 

iufade11  '  filed  with  the  Collector  of  Internal  Revenue  for  the  dis- 
trict in  which  the  person  has  his  legal  residence  or  prin- 
cipal place  of  business,  or  if  there  be  no  legal  residence 
or  place  of  business  in  the  United  States,  then  with 
the  Collector  of  Internal  Revenue,  Baltimore,  Maryland. 

SUFiIingte  The  return  for  the  year  ending  Dec.  31,  1916,  must 

be  filed  on  or  before  March  1,  1917,  and  the  return 
for  each  calendar  year  thereafter  must  be  filed  on  or 
before  March  1st  next  succeeding  such  calendar  year. 

Tfmento0FnI        In  Case  of  inability,  occasioned  by  sickness  or  busi- 
Return  "ess,  to  file  a  return  in  due  time  (March  1)  application 

for  extension  of  time  should  be  made  in  writing  to  the 
Collector,  on  or  before  the  day  on  which  the  return 
becomes  due,  for  an  extension  of  time;  such  extended 
time  cannot  exceed  thirty  days  from  March  1st  except 
that  the  Commissioner  of  Internal  Revenue  (Washing- 
ton) has  authority  to  grant  a  further  reasonable  exten- 
sion of  time,  in  meritorious  cases,  to  persons  traveling 
or  residing  abroad. 

Fernet™  Failure  to  file  returns  may  be  due  to  one  of  two  rea- 
File  Return  sons>  or  both  :  delinquency  or  refusal.  In  case  of  mere 
delinquency,  where  there  is  no  willful  intent  to  violate 
the  law,  it  seems  that  the  Collector  may  accept  offers 
in  compromise  in  lieu  of  specific  penalties  imposed  by 
the  law.  Where,  however,  there  is  a  refusal  or  willful 
intent  to  violate  the  law,  an  offer  of  compromise  will 
not  be  accepted  in  lieu  of  the  specific  penalty. 

Any  person  that  refuses  or  neglects  to  make  a  return 
of  annual  net  income,  who  is  subject  to  a  tax  by  provision 
of  law,  is  liable,  under  the  law,  to  a  penalty  of  not  less 
than  $20  nor  more  than  $1,000. 

"In  case  of  any  failure  to  make  and  file  a  return 
or  list  within  the  time  prescribed  by  law  or  by  the  Col- 
lector, the  Commissioner  of  Internal  Revenue  shall  add 
to  the  tax  50  per  centum  of  its  amount  except  that, 
when  a  retunj  is  voluntarily  and  without  notice  from 


14 


INCOME   TAX LAW   AND   ACCOUNTING 


the  Collector,  filed  after  such  time  and  it  is  shown  that 
the  failure  to  file  it  was  due  to  a  reasonable  cause,  and 
not  to  willful  neglect,  no  such  addition  shall  be  made 
to  the  tax." 

When  The  Commissioner  of  Internal  Revenue  in  cases  of 

Revenue  refusal  or  neglect  to  make  a  return,  or  in  case  of  an 
Officers  May  erroneous,  false,  or  fraudulent  return  having  been  made, 
^as  ^e  "S^t  to  make  a  return  m  behalf  of  the  party 
taxable  at  any  time  within  three  years  after  said  return 
is  due  or  has  been  made,  and  the  assessment  made  by 
the  Commissioner  in  such  case  shall  be  payable  by  such 
person,  or  persons,  immediately  upon  notification  of  the 
amount  of  such  assessment. 


False  Return 
Penalty 


Due  Date 
of  Payment 
Penalty  for 
Delayed 
Payment 
of  Tax 


Return  of 


"  Any  individual  *  *  *  required  by  law  to  make, 
render,  sign  or  verify  any  return  who  makes  any  false 
or  fraudulent  return  or  statement  with  intent  to  defeat 
or  evade  the  assessment  required  by  this  title  to  be  made, 
shall  be  guilty  of  a  misdemeanor,  and  shall  be  fined  not 
exceeding  $2,000  or  be  imprisoned  not  exceeding  one 
year,  or  both,  in  the  discretion  of  the  court,  with  the 
costs  of  prosecution." 

The  Commissioner  of  Internal  Revenue  is  required, 
on  or  before  the  first  day  of  June  of  each  year,  to  notify 
all  taxable  persons  of  the  amount  that  they  have  been 
assessed.  The  tax  becomes  payable  on  15th  day  of 
June.  After  ten  days'  notice  by  the  Collector,  there  will 
be  added  to  the  unpaid  taxes  interest  at  the  rate  of  one 
per  cent,  per  month  from  the  time  that  the  tax  became 
due  and  an  additional  penalty  of  five  per  cent,  of  the 
amount  of  the  tax. 

In  order  to  obtain  the  benefit  of  the  personal  exemp- 
t*on'  a  non"res^ent  alien  must  file,  or  cause  to  be  filed, 
a  true  and  accurate  return  of  all  income  received  from 
all  sources  within  the  United  States  regardless  of 
whether  such  income  is  less  than  $3,000  in  the  year.  But 
a  non-resident  alien  is  not  required  to  include  in  his  re- 


RETURNS    OF    INDIVIDUALS 


15 


Residence 

Defined 

Alien 


turn  income  derived  from  sources  without  the  United 
States. 

"  Residence  "  has  been  held  to  be  "  That  place  where 
a  man  has  his  true,  fixed  and  permanent  home  and  prin- 
cipal establishment,  and  to  which,  whenever  he  is  absent, 
he  has  the  intention  of  returning;  and  indicates  perman- 
ency of  occupation  as  distinct  from  lodging  or  boarding, 
or  temporary  occupation." 

An  alien,  temporarily  residing  in  the  United  States  or 
employed  therein  for  a  definite  time,  who  has  the  inten- 
tion of  leaving  upon  the  termination  of  his  employment 
or  mission,  is  deemed  not  to  be  a  resident  of  the  United 
States  for  purposes  of  the  income  tax. 

An  alien,  however,  who  has  his  principal  place  of  busi- 
ness, or  who  is  permanently  employed  in  the  United 
States,  though  his  domicile  be  without  the  United  States, 
is  deemed  to  be  a  "  person  residing  in  the  United  States, 
though  not  a  citizen  thereof  *  *  *." 

Claims  for  refund  of  taxes  after  assessment  has  been 
fixed,  should  be  made  on  Form  46,  to  which  should  be 
attached  the  receipt  for  taxes  paid  sought  to  be  recovered. 

Claims  for  abatement  of  taxes  or  penalties  must  be 
made  on  Form  47.  Each  of  these  claims  must  be  sup- 
ported by  the  affidavit  of  party  aggrieved,  and  by  affi- 
davit of  the  Collector  or  Deputy  Collector  of  the  district 
in  which  the  claim  is  made. 

The  present  income  tax  law  provides  that  claims  for 
the  refund  of  taxes  paid  under  the  excise  act  of  August 
5,  1909,  and  the  income  tax  act  of  October  3,  1913,  which 
have  been  rejected  by  reason  of  the  statute  of  limitation 
in  existence  prior  to  September  8,  1916,  may  be  reopened, 
provided  that  such  claims  for  refund  involve  a  review 
of  the  return  on  which  the  claim  is  made.  This  ques- 
tion was  ruled  upon  in  T.  D.1  2396,  dated  November  1, 

"T.  D."  refers  to  rulings  issued  by  the  Treasury  Department 
at  Washington. 


16 


INCOME   TAX — LAW  AND   ACCOUNTING 


1916,  containing  a  letter  written  to  the  Collector  of  In- 
ternal Revenue,  Los  Angeles,  California,  as  follows: 

"  This  office  is  in  receipt  of  your  letter  of  the  26th 
ultimo,  asking  for  a  ruling  as  to  whether,  under  section 
14,  paragraph  A,  of -the  act  of  September  8,  1916,  claims 
for  refund  which  have  once  been  rejected  by  the  com- 
missioner because  of  the  statute  of  limitation  in  existence 
at  that  time  may  be  reopened.  The  portion  of  section 
14  referred  to  is  in  the  following  words : 

" '  Provided,  That  upon  the  examination  of  any  return 
of  income  made  pursuant  to  this  title,  the  act  of  August 
5,  1909,  *  *  *  and  the  act  of  October  3,  1913,  *  *  * 
if  it  shall  appear  that  amounts  of  tax  have  been  paid  in 
excess  of  those  properly  due,  the  taxpayer  shall  be  per- 
mitted to  present  a  claim  for  refund  thereof  notwith- 
standing the  provisions  of  section  3228.' 

"  This  office  is  of  the  opinion  that  claims  can  now  be 
made  for  refund  under  that  provision.  Claims  rejected 
can  also  be  reopened  if  the  question  involves  an  exami- 
nation of  the  return.  The  power  does  not  extend  to 
other  claims  whose  adjustment  does  not  necessitate  an 
examination  of  the  return." 


Income 
Defined 


Undivided 
Surplus  of 
Corporation 


III.     INCOME  OF  INDIVIDUALS. 

Income,  for  the  purpose  of  the  tax,  comprehends  rev- 
enue and  income  from  all  sources,  as  follows:  gains, 
profits,  salaries  and  wages  received,  including  income 
from  professions,  vocations,  business,  trade,  commerce, 
sales,  dealings  in  or  use  of  real  and  personal  property, 
rents,  interest,  dividends,  securities,  transactions  of  any 
business  for  gain  or  profit  and  income  derived  from  any 
other  source  whatsoever. 

Although  the  law  provides  that  the  taxable  income  of 
an  individual  shall  include  the  share  to  which  he  would 
be  entitled  as  stockholder  or  otherwise  of  the  gains  and 
profits,  if  divided  or  distributed,  whether  divided  or  dis- 


INCOME   OF   INDIVIDUALS  17 

tributed  or  not,  of  all  corporations,  joint  stock  com- 
panies or  associations,  or  insurance  companies,  yet  it 
does  not  impose  upon  the  stockholder  the  duty  of  ascer- 
taining his  share  of  an  undistributed  surplus. 

Where  a  surplus  is  accumulated  beyond  the  reasonable 
needs  of  the  business,  such  unreasonable  accumulation 
shall  be  prima  facie  evidence  of  a  fraudulent  purpose  to 
escape  the  tax.  "  But  the  fact  that  the  gains  and  profits 
are.  in  any  case  permitted  to  accumulate  and  become  sur- 
plus shall  not  be  construed  as  evidence  of  a  purpose  to 
escape  the  said  tax  in  such  case  unless  the  Secretary  of 
the  Treasury  shall  certify  that  in  his  opinion  such  accu- 
mulation is  unreasonable  for  the  purposes  of  the  busi- 
ness. When  requested  by  the  Commissioner  of  Internal 
Revenue,  or  any  district  collector  of  internal  revenue, 
such  corporation,  joint  stock  company  or  association,  or 
insurance  company  shall  forward  to  him  a  correct  state- 
ment of  such  gains  and  profits  and  the  names  and  ad- 
dresses of  the  individuals  or  shareholders  who  would  be 
entitled  to  the  same  if  divided  or  distributed." 

Dividends  of       Dividends   paid   by   a   life   insurance  company   on  a 
Insurance       policy  that  has  not  matured  are  not  taxable  as  income, 
Companies      whether  paid  by  cash  or  deducted   from  current  pre- 
miums. 

Dividends  paid  on  a  paid-up  policy,  however,  should 
be  treated  the  same  as  stock  dividends,  free  from  the 
normal  tax  and  only  taxable  when  the  person  receiving 
the  same  has  an  annual  income  of  over  $20,000. 

Annuities  '  The  amount  paid  under  a  life  insurance,  endowment, 

or  annuity  contract  is  not  income  when  returned  to  the 
person  making  the  contract,  either  upon  the  maturity 
or  surrender  of  the  contract;  but  the  amount  by  which 
the  sum  received  exceeds  the  sum  paid  and  coming 
into  the  hands  of  the  person  making  the  contract  and 
payment  is  income.  When  the  settlement  under  such  a 
contract  is  made  in  more  than  one  payment  each  pay- 


18 


INCOME   TAX — LAW   AND   ACCOUNTING 


Damages, 
Injuries 


Accident 
Insurance 


Dividends 


Dividends 
Declared 
Payable  in 
Securities 


ment  will  be  considered  as  being  composed  of  interest 
and  a  proportionate  part  of  the  principal.  Where  the 
entire  annuity  is  composed  of  an  interest  return  upon 
the  principal  sum  paid  therefor,  the  entire  -annuity  is 
income."  (T.  D.  2090.) 

Amounts  received  from  a  railroad  company  as  reim- 
bursement for  expenses  occasioned  by  an  accident,  are 
not  considered  income  subject  to  tax.  Amounts  received, 
however,  in  compromise  or  settlement  of  an  action  for 
"  pain  and  suffering "  is  held  to  be  such  income  as  is 
taxable,  as  "  gains  or  profits  and  income  derived  from 
any  source  whatever."  (T.  D.  2135.) 

Money  received  by  an  injured  person  under  an  acci- 
dent policy  of  insurance  is,  for  income  tax  purposes 
deemed  to  be  income.  Payment  to  a  beneficiary,  how- 
ever, of  the  proceeds  of  an  accident  insurance  policy, 
upon  death  of  the  insured,  is  not  taxable  as  income. 

Corporations  pay  the  tax  of  2  per  cent,  on  their  entire 
net  income.  Hence,  dividends  paid  out  of  said  net  earn- 
ings are  free  from  the  normal  tax  in  the  hands  of  stock- 
holders. 

But  a  person  whose  entire  income  is  composed  of 
dividends  is  not  absolved  from  making  a  return,  if  the 
aggregate  thereof  is  $3,000  or  over  within  the  year. 

Dividends  declared  payable  in  securities  should  be 
stated  in  the  return  of  the  stockholder  at  the  cash  value 
of  such  securities.  The  cash  value  is  measured, 
primarily,  by  the  amount  charged  to  surplus  account  on 
the  books  of  the  corporation  declaring  the  dividend. 
For  example,  dividends  declared  payable  in  Anglo-French 
bonds  at  95,  will  be  returnable  by  the  recipient,  for  in- 
come tax  purposes,  at  the  aggregate  amount  of  such 
bonds  received,  computed  at  $95  on  each  $100  of  the 
par  value  thereof. 


INCOME   OF   INDIVIDUALS 


19 


Dividends 


1913 


Stock 
Dividends 


Cash  Value 
of  Stock 
Dividends 


Dividends  paid  out  of  earnings  of  a  corporation  ac- 
crued prior  to  March  1,  1913,  are  not  subject  to  the 
additional  or  surtax. 

Stock  dividends  paid  by  a  corporation  are  subject  to 
the  income  tax  based  on  the  cash  value  of  such  stock. 

It  has  been  held  that  the  cash  value  of  stock  dividends 
shall  be  the  amount  represented  by  the  stock  distributed 
as  dividends  charged  to  surplus  account,  except  where 
part  of  such  surplus  has  been  accrued  prior  to  March 
1,  1913.  In  the  latter  case  the  cash  value  is  such  of 
"  the  proportionate  share  of  the  surplus  accrued  to  the 
paying  corporation  since  March  1,  1913,  as  is  represented 
by  the  stock  distributed,  or  ordered  to  be  distributed." 

Sales  of  Sales  of  "  rights  "  to  subscribe  to  capital  stock,  ac- 

Income  cruing  to  stockholders  in  the  case  of  new  issues,  are 

deemed  to  be  income. 


Exchange  of 
Stock 


An  exchange  of  one  share  of  stock  of  a  corporation 
for  two  shares  of  stock  of  another  corporation,  both 
having  the  same  par  value,  does  not  constitute  taxable 
income  until  the  stock  received  in  exchange  is  sold ;  then 
the  profit  will  be  the  difference  between  the  selling  price 
and  the  purchase  price  of  stock  first  acquired. 

Return  of  Payments  made  to  stockholders  of  a  liquidated  or  dis- 

StocMiolders  s°lved  corporation  as  prorata  return  of  capital  is  not 
taxable,  but  any  payments  out  of  the  surplus  of  a  cor- 
poration accrued  since  March  1,  1913,  shall  be  returned 
as  income. 

Interest  on          Interest    upon    the    obligations    of    a    State,    or    any 

Obligations     political  subdivision  thereof,  or  upon  the  obligations  of 

Not  Taxable  the  United  States  or  its  possessions,  or  securities  issued 

under  the  provisions  of  the  Federal  farm  loan  account 

of  July  17,  1916,  are  exempt,  by  law,  from  the  income 

tax. 


20 


INCOME   TAX — LAW   AND   ACCOUNTING 


Income 
Received 
by  Estates 


Salary  Paid 
by  Stock 


Bonuses 


Salaries 


Money 
Equivalent 


"Income  received  by  estates  of  deceased  persons  during 
the  period  of  administration  or  settlement  of  the  estate, 
shall  be  subject  to  the  normal  and  additional  tax  and 
taxed  to  their  estates."  This  is  true  also  of  income 
from  any  kind  of  property  held  in  trust,  including  that 
on  accumulated  income  held  in  trust  for  the  benefit  of 
"  unborn  or  unascertained  persons,  or  persons  with  con- 
tingent interests  and  income  held  for  future  distribution 
under  the  terms  of  the  will  or  trust."  In  such  cases,  ex- 
cept where  the  beneficiary  makes  the  return,  the  executor, 
administrator  or  trustee  shall  make  a  return  and  be  as- 
sessed on  such  income,  less  the  exemption  allowed  to 
estates  during  administration. 

Salary  paid  in  the  capital  stock  of  a  corporation  is 
taxable  as  income  based  on  its  cash  value. 

Bonuses  received  from  employers  in  the  nature  of  addi- 
tional compensation  and  not  as  gratuities  are  taxable  as 
income  of  the  recipient.  (See  page  100.) 

Salaries  need  not  be  returned  as  income  until  actually 
received. 

Any  money  equivalent  received  by  an  employee,  in  lieu 
of  money  compensation,  is  returnable  as  income  at  the 
value  thereof. 


Rental  Value  Rental  value  of  living  quarters  furnished  to  an  em- 
ployee is  held  to  be  income  and  should  be  included  in  the 
return  of  the  individual  at  the  value  thereof. 


Income  Not 
in  Trade 


When 


Returnable 


All  profits  or  income  whether  made  "  in  trade  "  or 
otherwise,  are  taxable  income.  (See  "  Deductions," 
page  26.) 

Fees  for  professional  services  need  not  be  returned  as 
income  until  received.  Promissory  notes,  however,  re- 
ceived in  payment  of  such  fees  shall  be  deemed  to  be  in- 
come received. 


INCOME   OF    INDIVIDUALS 


21 


Promissory 
Notes 


Property 
Acquired 
by  Gift 


Clergymen 


Insurance 
Agents 


Rents 


Compensation 
of  Trustee 


Pensions 


Where  income  is  computed  on  the  basis  of  actual  re- 
ceipts and  disbursements,  a  promissory  note  is  deemed 
payment  of  an  account  and  is  returnable  as  income.  In 
the  event  that  such  note  is  not  paid,  it  is  deductible  as  a 
loss  when  actually  ascertained  to  be  worthless. 

Property  acquired  by  gift  is  not  taxable,  but  the  in- 
come accruing  therefrom  after  receipt  of  such  gift  is  in- 
come and  subject  to  the  tax.  Property  acquired  by  gift 
and  thereafter  sold  at  an  advance  of  the  value  when 
gift  was  received,  yields  a  profit  of  the  difference  between 
the  selling  price  and  such  value,  that  is  taxable  as  income. 
If  such  property  was  acquired  prior  to  March  1,  1913, 
then  the  profit  will  be  the  difference  between  the  selling 
price  and  the  fair  market  value  as  at  March  1,  1913. 

Fees  received  by  clergymen,  in  addition  to  salary  com- 
pensation, for  any  form  of  service,  are  construed  to  be 
taxable  income.  • 

Commissions  received  on  renewal  premiums  are  tax- 
able income  in  the  year  received  by  the  agent.  The 
premium  on  a  policy  of  insurance  received  by  an  insur- 
ance agent  on  account,  or  in  payment  of  commission,  in 
lieu  of  cash,  is  deemed  to  be  income. 

Rent  should  be  included  in  the  return  of  the  landlord 
for  the  year  in  which  it  is  actually  received,  irrespective 
of  when  it  accrued  or  became  due. 

Compensation  received  by  a  trustee  covering  a  period 
of  years  and  not  paid  or  reported  as  income  until  ma- 
turity of  trust,  has  been  held  to  be  returnable  in  the 
year  received  and  deductions  therefrom  may  not  be  pro- 
rated over  the  years  of  the  trusteeship.  Only  deduc- 
tions applicable  to  the  year  income  is  returned  are 
allowable. 

Pensions  received  from  the  United  States  Government 
are  deemed  to  be  taxable  income. 


22  INCOME   TAX — LAW  AND   ACCOUNTING 

Profit  on  Profit  on  the  sale  of  capital  assets  is  returnable  as  in- 

Caplta^Assets come-  The  profit  on  sales  of  capital  assets  acquired 
prior  to  March  1,  1913,  is  the  excess  of  the  selling  price 
over  the  fair  market  price  or  value  of  such  property  as 
of  March  1,  1913.  In  the  case  of  property  acquired  since 
that  date  the  profit  is  the  selling  price  in  excess  of  the 
cost.  If  the  capital  asset  is  one  on  which  depreciation 
has  been  charged  off,  it  is  reasonable  to  assume  that  such 
depreciation  should  be  taken  into  consideration  in  de- 
termining the  profit  or  loss.  For  example,  a  machine 
purchased  on  January  1,  1914,  for  $1,000  on  which  de- 
preciation was  charged  off  at  the  rate  of  10  per  cent,  per 
annum  for  years  1914  and  1915,  sold  on  January  1,  1916, 
for  $850,  would  show  a  profit  of  $50,  derived  as  follows : 

Selling  price $850  00 

Cost    $1,000  00 

Less     Depreciation     charged     off 

(20%)    200  00 

800  00 


Profit   ; $50  00 


The  law  itself  makes  no  mention  of  depreciation 
charged  off  prior  to  the  time  of  sale,  nor  has  there,  as 
yet,  been  any  ruling  on  the  question.  From  an  account- 
ing point  of  view,  however,  there  is  only  one  logical  con- 
clusion, and  that  is  to  deduct  whatever  depreciation  had 
previously  been  charged  off  before  determining  the  profit 
or  loss,  provided  that  repairs  and  renewals  had  been 
charged  against  revenue  and  not  against  the  reserve  for 
depreciation.  Should  repairs  have  been  charged  against 
the  reserve,  then  the  cost  of  such  repairs  would  be  a  re- 
duction of  the  depreciation  deducted  from  the  cost  of  the 
machine  ;in  determining  amount  of  profit  on  the  sale. 
Assuming,  in  the  above  example,  that  repairs  and  re- 
newals cost  $25,  the  result  would  be  as  follows : 


INCOME   OF    INDIVIDUALS  23 

Selling  price  $850  00 

Cost   $1,000  00 

Deduct : 

Depreciation     charged 

off    (20%) $200  00 

Less   Repairs    25  00 

175  00 
825  00 


Profit  $25  00 


Computing  For  the  purpose  of  ascertaining  the  profit  or  loss,  for 
Loss  on"  income  tax  purposes,  arising  in  connection  with  prop- 
Property  erty  which  was  acquired  prior  to  March  1,  1913,  the  pro- 
Prior1  to  rating  of  actual  time  property  has  been  held  should  be 
March  1,1913  ascertained  in  years  and  months,  a  fractional  part  of  a 
month  being  counted  as  a  whole  month  when  the  frac- 
tion is  fifteen  days  or  more  and  discarded  when  the  frac- 
tion is  less  than  fifteen  days.  (T.  D.  2291.) 

Fair  Market  In  determining  the  fair  market  price  or  value  for  the 
Value ^f  purpose  of  ascertaining  the  profit  or  loss  on  the  sale  of 
Securities  stocks  or  bonds  acquired  prior  to  March  1,  1913,  where 
such  stocks  or  bonds  are  dealt  in  on  the  exchange,  it 
has  been  stated  by  the  Commissioner  of  Internal  Revenue 
in  a  letter  to  the  Corporation  Trust  Co.,  dated  November 
21,  1916,  that  such  fair  market  price  would  be  the  average 
price  at  which  such  securities  sold  on  March  1,  1913,  and 
not  the  price  at  which  they  sold  at  any  particular  time  of 
the  day.  The  acceptability  of  market  quotations  is,  never- 
theless, conditioned  upon  the  same  being  the  "  fair 
market  price  or  value/' 

Fair  Market        No   particular   basis   or  method  of   computation   has 

Price  or  Value  -111          i_  •  i  />      >u     «  r   •  1 

as  of  been  prescribed  by  which  to  fix  the     fair  market  price 

March  I,        or  vaiue  "  for  the  purpose  of  ascertaining  the  profit  or 
Generally       loss  on  property  acquired  prior  to  March  1,  1913.    The 


24 


INCOME   TAX — LAW   AND   ACCOUNTING 


price  or  value  of  property  should  be  determined  upon 
all  the  relevant  facts  governing  the  particular  case. 

Profit  Defined  Profit,  for  income  tax  purposes,  has  been  defined  as 
the  difference  between  the  selling  price  and  the  cost, 
where  the  selling  price  is  more  than  the  cost. 


Specific 
Exemption 


Specific 
Exemption, 
Nonresident 
Alien 


Head  of 

Family 

Defined 


IV.     DEDUCTIONS  ALLOWED  TO  INDIVIDUALS. 

The  specific  or  personal  exemptions,  deductible  under 
the  amended  law,  as  compared  with  those  under 
the  old  income  tax  law,  have  been  liberally  extended. 
They  are  as  follows : 

Unmarried   person    $3,000  per  annum 

Married    person,    living    with    husband 

or  wife 4,000  " 

Head    of    family 4,000  " 

Nonresident  alien    (obtainable  only  by 
filing  true  and  accurate  return)  : 

Single  person   3,000  " 

Married  person    4,000  " 

Estate  of   deceased  person  during  pe- 
riod of  administration 3,000  " 

The  single  or  married  status  of  a  person  at  the  close 
of  the  year  determines  the  amount  of  the  specific  exemp- 
tion. 

A  nonresident  alien  is  not  entitled  to  the  specific  ex- 
emption on  his  income  until  the  end  of  the  year  and 
then  only  if  he  makes  and  files  a  true  and  accurate  re- 
turn of  his  total  net  income  received  from  all  sources 
within  the  United  States. 

"  When  one  or  more  individuals  are  dependent,  either 
in  whole  or  in  principal  part,  for  their  actual  support  and 
maintenance  upon  another  who  by  reason  of  some  legal 
or  moral  obligation  controls  and  provides  for  such  indi- 
viduals, the  one  who  assumed  the  support,  maintenance 
and  control  of  the  others  is,  for  Federal  income  tax 


DEDUCTIONS   ALLOWED  INDIVIDUALS 


25 


Personal 
Exemption 
Ward— 
Cestui  que 
Trust 

Exemption 
Estate 


Necessary 
Business 
Expenses 
Deductible 


purposes,  held  to  be  '  a  head  of  a  family  '  and  entitled 
to  the  specific  exemption  of  $4,000    *     *     *." 

A  guardian  or  trustee  is  allowed  to  deduct  a  personal 
exemption  of  his  ward,  or  cestui  que  trust,  of  $3,000, 
or,  if  married,  $4,000. 

The  estate  of  a  deceased  person  during  the  period  of 
administration  thereof,  is  entitled  to  an  exemption  of 
$3,000. 

A  citizen  or  resident  of  the  United  States  in  comput- 
ing his  net  income  is  allowed  as  deductions  from  gross 
income,  all  necessary  expenses  paid  in  carrying  on  his 
business  or  trade.  Personal,  living,  or  family  expenses 
are  not  deductible. 


Interest  ^11  interest  paid  within  the  year  on  his  indebtedness 

Paid  on  " 

Indebtedness  is  deductible.       . 

Deductible 

Taxes  Taxes  paid  within  the  year  including  those  imposed 

Deductible  by  authority  of  a  state>  the  United  States,  or  its  terri- 
tories, or  possessions,  or  any  foreign  country  are  de- 
ductible. Those  imposed  under  authority  of  any  State 
include  county,  school  district,  municipality,  or  other 
taxing  subdivision,  except  assessments  for  local  benefits. 
Taxes  paid  by  an  individual  or  corporation  on  securi- 
ties, to  make  them  tax-free,  are  not  deductible  items. 


Local 

Not68         S 
Deductible 


Income  Tax 
Deductible 


Taxes  paid  in  the  nature  of  local  benefits,  such  as 
grading,  paving,  sidewalks,  sewerage,  etc.,  are  not  de- 
ductible. These  are  deemed  to  be  capital  expenditures 
on  the  theory  that  the  improvement  increases  the  value 
of  the  property  affected  thereby. 

The  amounts  paid  to  the  Collector  and  the  amounts 
withheld  at  the  source  on  account  of  the  income  tax  are 
allowable  deductions  from  income,  as  expenses,  in  the 
year  in  which  the  taxes  are  paid  to  the  Collector  of  In- 
ternal Revenue. 


26  INCOME   TAX — LAW  AND   ACCOUNTING 

Water  Rates  Water  rates  on  business  or  rented  property  may  be  de- 
ducted as  "necessary  expenses."  They  should  not  be 
deducted  as  taxes. 

Losses  "  Losses  actually  sustained   during  the  year,  arising 

from  fires,  storms,  shipwreck,  or  other  casualty,  and  from 
theft,  when  such  losses  are  not  compensated  for  by  in- 
surance or  otherwise  "  are  deductible. 

Losses  Not  in      Under  the  old  income  tax  law   (1913)   the  deduction 
Trade  °f  l°sses  sustained  outside  of  the  taxpayer's  business  or 

trade  were  not  deductible.  He  was  required  to  account 
for  profits  and  income  from  all  sources,  but  was  prohib- 
ited from  deducting  any  losses  not  incurred  in  trade. 
The  amended  law,  however,  provides  that  in  "  any  trans- 
actions entered  into  for  profit,  but  not  connected  with 
his  business  or  trade,  the  losses  actually  sustained  therein 
during  the  year  to  an  amount  not  exceeding  the  profits 
arising  therefrom "  are  deductible.  This  provision 
would  apply  to  stock  speculations,  real  estate  operations 
and  any  speculative  venture  which  is  not  embraced  in  the 
ordinary  business  or  trade  of  the  taxpayer. 

Loss  Defined  By  rulings  of  the  Treasury  Department,  loss  has  been 
defined  as  the  difference  between  the  selling  price  and 
the  cost,  where  the  selling  price  is  less  than  the  cost. 

Losses  in  One      According  to  the   English   income  tax  law,   an  indi- 

Deductible      vidual  engaged  in  two  businesses  cannot  deduct  the  loss 

from  Income  in   one   from   the   income   of   another.     That   is   not   so 

under  our  income  tax  law.     The  loss  sustained  in  one 

is  deductible  from  the  profit  of  the  other;  but  the  person 

must  be  actually  engaged  in  the  businesses  or  trades. 

In  Trade  "  '  In  trade  '  is  synonymous  with  business. 

Defined 

"  Business  "  has  been  defined  as — 
"  That  which  occupies  and  engages  the  time,  attention 
and  labor  of  any  one  for  the  purpose  of  livelihood,  profit 


DEDUCTIONS   ALLOWED  INDIVIDUALS  27 

or  improvement;  that  which  is  his  personal  concern  or 
interest;  employment,  regular  occupation,  but  it  is  not 
necessary  that  it  should  be  his  sole  occupation  or  employ- 
ment. 

"The  doing  of  a  single  act  incidentally  or  of  neces- 
sity, not  pertaining  to  the  particular  business  of  the  per- 
son doing  the  same,  will  not  be  considered  engaging  in 
or  carrying  on  the  business."  (T.  D.  1989.) 

Bad  Debts  "  Debts  due  to  the  taxpayer  actually  ascertained  to  be 
worthless  and  charged  off  within  the  year  "  are  deduct- 
ible. (See  "Bad  Debts,"  page  103.) 

Depreciation  A  reasonable  allowance  for  the  exhaustion,  wear  and 
tear  of  property,  arising  out  of  its  use  or  employment  in 
the  business  or  trade,  is  deductible. 

In  order  to  render  depreciation  deductible  it  must  be 
entered  in  the  books  of  account  in  such  way  that  it  effects 
a  reduction  of  the  asset  account  to  which  it  is  applicable. 
This  may  be  accomplished  by  establishing  a  Reserve  for 
Depreciation  Account  or  by  actual  reduction  of  the  asset 
account  itself.  The  preferable  method  is  to  create  a  re- 
serve account,  except,  perhaps,  with  respect  to  properties 
that  are  replaced  often. 

When  the  depreciation  deducted  equals  the  cost  of 
property  depreciated,  or  in  case  of  purchase  prior  to 
March  1,  1913,  the  fair  market  value  as  of  that  date, 
then  no  further  deduction  will  be  allowed.  (See  Chap- 
ter IV,  on  Depreciation,  page  68.) 

Depletion  "  In  the  case  of  oil  and  gas  wells  a  reasonable  allow- 

WeHs  ance  f°r  actual  reduction  in  flow  and  production  to  be 

ascertained  not  by  the  flush  flow,  but  by  the  settled  pro- 
duction or  regular  flow  "  is  a  deductible  item.  When 
such  allowance,  however,  aggregates  the  capital  original- 
ly invested,  or  in  case  of  purchase  prior  to  March  1, 
1913,  the  fair  market  value  as  of  that  date,  then  no  fur- 
ther allowance  for  depletion  will  be  deductible. 


28 


INCOME   TAX  —  LAW  AND   ACCOUNTING 


Depletion  of        A  reasonable  allowance  for  depletion  of  mines  will  be 
Mines  deductible,  not  to  exceed,  however,  the  market  value  in 

the  mine  of  the  product  thereof,  which  has  been  moved 
and  sold  during  the  year  for  which  the  return  and  compu- 
tation are  made.  As  in  the  case  of  oil  and  gas  wells,  no 
further  allowance  for  depletion  will  be  allowed  when 
the  aggregate  thereof  equals  the  capital  originally  in- 
vested, except  that  in  case  the  property  was  acquired 
prior  to  March  1,  1913,  then  no  deduction  will  be  allowed 
in  excess  of  the  fair  market  value  of  the  property  as  of 
that  date. 

Improve-  No  deduction  is  allowed  for  any  amount  paid  out  for 

Deductible      new  buildings,  permanent  improvements  or  betterments 
made  to  increase  the  value  of  any  property. 


Restoring 


Replaced 


No  deduction  is  allowed  for  amounts  expended  to 
restore  property  or  for  making  good  the  exhaustion 
thereof  for  which  an  allowance  is  or  has  been  made. 
(See  page  77.) 

A  loss  sustained  by  the  voluntary  removal  of  a  build- 
ing, for  the  purpose  of  erecting  one  more  modern,  is  not 
deductible  from  a  return  of  net  income,  but  such  loss 
may  be  added  to  the  cost  of  the  new  building. 

Buildings  Where  a  dilapidated  building  is  taken  down  by  order 

b^o?dw-°ofn  of   a   builclmg   department   of   the   Government,   acting 

Government    under  authority  of  a  statute,  because  such  building  is 

a  menace  to  public  safety,  the  owner  thereof  for  the  loss 

sustained  might,  under  some  circumstances,  be  entitled 

to  a  deduction  of  the   difference  between  the  cost  of 

the  building  (exclusive  of  land)  and  a  reasonable  allow- 

ance for  depreciation  for  the  years  of  its  existence. 

Damage  Suits      The  test  as  to  the  deductibility  of  an  amount  paid 

Judgment       jn  compromise   or  settlement  of   a  claim,   or  cause  of 

action,  for  personal  injuries  is,  whether  the  liability  was 

incurred  "  in  trade."    A  payment  in  settlement  of  a  suit 


DEDUCTIONS    ALLOWED   INDIVIDUALS 


29 


for  injuries  caused  by  a  delivery  truck  of  a  corporation 
or  individual  used  "  in  trade "  would  be  deductible, 
whereas,  damages  paid  for  injuries  caused  by  the  pri- 
vate automobile  of  an  individual  would  not  be  deductible. 

Insurance  A  reserve  or  fund  set  aside  by  either  an  individual 

FundTfotr      or  corporation  for  insurance  purposes  is  not  a  deductible 
Deductible      item.     But  an  actual  loss  sustained  and  charged  to  such 
reserve  or  fund  may  be  deducted. 

Fire  insurance  premiums  on  a  rented  dwelling,  not 
occupied  by  the  owner,  are  deductible. 

Usually  bonds  are  sold  at  a  price,  plus  accrued  in- 
terest to  the  date  of  sale.  Such  accrued  interest,  paid 
by  the  purchaser,  is  deductible  by  him  as  interest  paid. 

Commission  paid  to  a  real  estate  agent  for  collecting 
rents  and  management  of  property  is  an  allowable  de- 
duction. 


Fire 

Insurance 

Premiums 

Accrued 
Interest 
on  Bonds 
Purchased 
Deductible 

Commission 
Paid  Real 
Estate  Agent 
Deductible 

Political 

Campaign 

Expenses 

Life 

Insurance 

Premium 

Stock 
Assessments 


Alimony 

Living  and 
Household 
Expenses 

Premium 
on  Fidelity 
Bond 


Deductions 

Nonresident 

Alien 


Contributions  to  the  campaign  expenses  of  a  political 
party  have  been  held  not  to  be  deductible  from  income. 

Premiums  paid  on  life  insurance  policies  of  the  in- 
sured are  not  allowable  deductions. 

Stock  assessments  are  held  to  be  investments  of  cap- 
ital and  not  deductible. 

Alimony  is  not  a  deductible  expense. 

The  law  does  not  permit  of  deduction  of  personal,  liv- 
ing and  family  expenses. 

Where  an  employee  pays  the  cost  of  a  fidelity  bond 
incident  to  his  employment,  he  may  deduct  the  cost 
thereof. 

In  computing  net  income  of  nonresident  aliens,  the 
following  deductions  are  allowed: 

Necessary  expenses  of  carrying  on  business  or  trade 
within  the  United  States. 


30  INCOME   TAX — LAW   AND   ACCOUNTING 

"  The  proportion  of  all  interest  paid  within  the  year 
by  such  person  on  his  indebtedness  which  the  gross 
amount  of  his  income  for  the  year  derived  from  sources 
within  the  United  States  bears  to  the  gross  amount  of 
his  income  for  the  year  derived  from  all  sources  within 
and  without  the  United  States,  but  this  deduction  shall 
be  allowed  only  if  such  person  includes  in  the  return 
required  by  section  eight,  all  the  information  necessary 
for  its  calculation." 

All  taxes  paid  within  the  year  imposed  by  authority  of 
the  United  States,  a  State,  or  any  political  subdivision 
thereof,  not  including  assessments  for  local  improve- 
ments. 

Losses  actually  sustained  during  the  year  in  trade  con- 
ducted in  the  United  States,  and  losses  of  property  with- 
in the  United  States  arising  from  fires,  storms,  ship- 
wreck, or  other  casualty,  and  from  theft,  when  such 
losses  are  not  compensated  for  by  insurance  or  other- 
wise. 

The  losses  of  nonresident  aliens  sustained  in  trade  or 
speculative  transactions  not  in  trade,  on  property  ac- 
quired prior  to  March  1,  1913,  shall  be  determined  on  a 
basis  of  the  fair  market  price  or  value  of  such  property 
as  of  March  1,  1913. 

Losses  sustained  in  transactions  not  connected  with 
his  business  or  trade  arising  in  the  United  States  within 
the  year  not  exceeding  the  profit  derived  therefrom. 

Bad  debts  sustained  in  business  or  trade  within  the 
United  States,  ascertained  to  be  worthless  and  actually 
charged  off  within  the  year. 

A  reasonable  allowance  for  depreciation  and  deple- 
tion of  property  within  the  United  States  sustained  dur- 
ing the  year  arising  out  of  its  use  or  employment  in 
business  or  trade,  to  the  same  extent  and  with  the  same 
limitations  as  are  applicable  to  properties  of  citizens 
and  resident  aliens. 

Credit  for  the  amount  of  normal  tax  paid  or  with- 
held at  the  source,  including  that  on  dividends  and  any 


TAX    WITHHELD   AT   SOURCE 


31 


Withholding 
Tax 


Normal 

Tax 

Withheld 


Deduction  of 
Tax  from 
Interest  on 
Bonds  and 
Mortgages  of 
Corporations 


other  income  on  which  the  normal  tax  is  exempt  or  paid 
at  the  source. 

Specific  exemptions,  provided  a  true  and  accurate  re- 
turn is  made  and  filed  in  due  time. 

V.  TAX  WITHHELD  AT  SOURCE. 
The  provisions  of  law  requiring  the  withholding  of 
tax  by  payers  of  income  applies  only  to  the  normal  tax 
and  is  not  applicable  to  corporations  formed  under  the 
laws  of  the  United  States  or  any  State  or  Territory 
thereof,  and  copartnerships  composed  of  citizens  or  resi- 
dent aliens  of  the  United  States. 

For  the  calendar  year  1916,  the  law  provides  that  only 
1  per  cent,  shall  be  withheld,  the  recipient  of  income  to 
account  for  the  remaining  1  per  cent.  On  and  after 
January  1,  1917,  the  entire  normal  tax  of  2  per  cent, 
shall  be  withheld.. 

The  amount  of  the  normal  tax  shall  be  deducted  and 
withheld  and  paid  to  the  Government  from  all  fixed 
and  determinable  annual  and  periodical  gains,  profits 
and  income  derived  from  interest  upon  bonds  and  mort- 
gages or  deeds  of  trust  or  other  similar  obligations  of 
corporations,  joint-stock  companies,  associations  and 
insurance  companies,  irrespective  of  when  paid,  annu- 
ally or  at  shorter  or  longer  periods,  although  such  in- 
terest does  not  amount  to  $3,000  per  annum. 

Likewise,  the  amount  of  such  tax  shall  be  deducted  and 
withheld  from  coupons,  checks  or  bills  of  exchange  for  or 
in  payment  of  interest  upon  bonds  of  foreign  countries 
and  upon  foreign  mortgages  or  like  obligations;  also, 
from  coupons,  checks  or  bills  of  exchange  in  payment 
of  any  dividends  upon  the  stock  or  interest  upon  the 
obligations  of  foreign  organizations,  associations  and 
insurance  companies  engaged  in  business  in  foreign 
countries.  "  And  the  tax  in  such  cases  shall  be  with- 
held, deducted  and  returned  for  and  in  behalf  of  any 
person  subject  to  the  tax  hereinbefore  imposed,  al- 


32 


INCOME   TAX — LAW  AND   ACCOUNTING 


License 
Required  by 
Collectors 
of  Certain 
Foreign 
Income 


Tax  Free 
Bonds 


though  such  interest  or  dividends  do  not  exceed  $3,000, 
by: 

1.  "Any  banker  or  person  who  shall  sell  or  otherwise 
realize,  coupons,  checks  or  bills  of  exchange,  drawn  or 
made  in  payment  of  any  such  interest  or  dividends  (not 
payable  in  the  United  States). 

2.  "Any  person  who  shall  obtain  payment  (not  in  the 
United  States)  in  behalf  of  another,  of  such  dividends 
and  interest  by  means  of  coupons,  checks  or  bills  of  ex- 
change, and  also 

3.  "Any  dealer  in  such  coupons  who  shall  purchase 
the  same  for  any  such  dividends  or  interest  (not  pay- 
able in  the  United  States),  otherwise  than  from  a  banker 
or  another  dealer  in  such  coupons." 

"All  persons,  firms,  or  corporations  undertaking  as 
a  matter  of  business  or  for  profit  the  collection  of  for- 
eign payments  of  such  interest  or  dividends  by  means  of 
coupons,  checks,  or  bills  of  exchange  shall  obtain  a  license 
from  the  Commissioner  of  Internal  Revenue,  and  shall 
be  subject  to  such  regulations  enabling  the  Government 
to  ascertain  and  verify  the  due  withholding  and  payment 
of  the  income  tax  required  to  be  withheld  and  paid  as 
the  Commissioner  of  Internal  Revenue,  with  the  ap- 
proval of  the  Secretary  of  the  Treasury,  shall  prescribe ; 
and  any  person  who  shall  knowingly  undertake  to  col- 
lect such  payments  as  aforesaid  without  having  obtained 
a  license  therefor,  or  without  complying  with  such  regu- 
lations, shall  be  deemed  guilty  of  a  misdemeanor  and  for 
each  offense  be  fined  in  a  sum  not  exceeding  $5,000, 
or  imprisoned  for  a  term  not  exceeding  one  year,  or  both, 
in  the  discretion  of  the  court." 

The  law  does  not  recognize  tax  free  covenants  in 
bonds.  "  In  the  case  of  bonds  or  other  indebtedness 
which  have  been  issued  with  a  guaranty  that  the  interest 
payable  thereon  shall  be  free  from  taxation,  no  deduc- 
tion for  the  payment  of  the  tax  herein  imposed,  or  any 


TAX    WITHHELD   AT   SOURCE 


33 


Scrip 
Certificates 


Withholding 
Tax  on 
Commercial 
Paper  of 
Corporations 


Compulsory 
Deduction 
at  Source 
on  Income 
in  Excess 
of  $3,000 


other   tax   paid   pursuant    to    such    guaranty,    shall   be 
allowed." 

"  Scrip  certificates  issued  by  a  corporation  to  its  stock- 
holders in  lieu  of  dividends,  such  scrip  certificates  bear- 
ing interest  and  redeemable  at  a  specified  time  not  longer 
than  one  year  from  date  of  issue,  are  not  corporate 
obligations  similar  to  bonds,  mortgages,  or  deeds  of  trust, 
and  the  interest  payable  thereon  will  not  be  subject  to 
withholding  except  when  the  amount  thereof  payable  to 
an  individual  in  a  calendar  year  exceeds  $3,000.  Pay- 
ment in  scrip  is  held  to  be  equivalent  to  payment  in  cash, 
and  when  the  amount  of  interest  paid  on  such  scrip  to 
any  one  individual  in  a  calendar  year  is  in  excess  of 
$3,000  the  tax  must  be  withheld  and  accounted  for  in 
excess  of  exemption  claimed."  (T.  D.  2090,  as  amended 
by  T.  D.  2152.) 

"  Interest  payments  on  ordinary,  bankable  commercial 
paper  of  corporations,  payable  to  individuals,  are  subject 
to  withholding  at  the  source  only  when  the  payment  to 
any  one  individual  within  a  taxable  year  exceeds  $3,000. 
On  all  other  obligations  of  corporations,  etc.,  payable 
to  individuals,  interest  payments  are  subject  to  withhold- 
ing regardless  of  the  amount  of  interest  payment. 

"A  simple  promissory  note  not  exceeding  one  year  in 
time,  is  not  '  similar  to  bonds,  mortgages  or  deeds  of 
trust  of  corporations/  and  the  interest  on  such  a  note 
is  not  subject  to  withholding  except  when  the  amount  of 
interest  thereon,  payable  to  an  individual  in  any  one 
year  is  in  excess  of  $3,000  or  when  the  interest  thereon 
is  payable  to  a  nonresident  alien,  in  which  latter  case 
the  tax  should  be  withheld,  regardless  of  the  amount 
of  interest  payment."  (T.  D.  2090.) 

Except  on  income  derived  from  dividends  on  capital 
stock  or  net  earnings  of  corporations,  the  normal  tax 
shall  be  withheld  at  the  source  on  all  payments  to  indi- 
viduals in  excess  of  $3,000  for  any  year,  on  all  gains, 


34  INCOME   TAX — LAW  AND   ACCOUNTING 

profits  and  income,  less  the  personal  exemption,  where 
a  certificate  of  exemption  has  been  filed  with  the  payer. 
This  provision  is  applicable  to  "  all  persons,  firms,  co- 
partnerships, companies,  corporations,  joint  stock  com- 
panies or  associations  and  insurance  companies,  in 
whatever  capacity  acting,  including  lessees  or  mortgagors 
of  real  or  personal  property,  trustees  acting  in  any  trust 
capacity,  executors,  administrators,  receivers,  conserva- 
tors, employers  and  all  officers  and  employees  of  the 
United  States,  having  the  control,  receipt,  custody,  dis- 
posal or  payment  of  interest,  rent,  salaries,  wages, 
premiums,  annuities,  compensation,  remuneration,  emolu- 
ments or  other  fixed  or  determinable  annual  or  periodical 
gains,  profits  and  income  of  another  person."  All  those 
required  to  withhold  at  the  source,  as  above  indicated,  are 
made  personally  liable  for  such  tax  as  they  are  required 
to  withhold. 

The  taxes  withheld  should  be  reported  on  Form  1042 
Revised,  and  filed  annually  with  the  Collector  on  or 
before  March  1st  of  each  year. 

Specific  No  person  shall  receive  the  benefit  of  the  personal  ex- 

Exemption—  ernption  except  where  he  or  she  shall  file,  not  less  than 
Obtained  thirty  days  prior  to  the  day  on  which  the  return  is  due, 
with  the  person  who  is  required  to  withhold  and  pay  the 
tax,  a  signed  notice  in  writing,  claiming  the  benefit  of 
such  exemption  (Form  1007  Revised)  ;  thereupon  no 
tax  shall  be  withheld  upon  the  amount  of  such  exemp- 
tion. 

Penalty  for  Any  person  who  knowingly  makes  a  false  statement  or 
Re^resenta-  ^se  rePresentati°n;  ^or  the  purpose  of  obtaining  any 
tion  allowance  or  reduction  by  virtue  of  a  claim  for  exemp- 

tion, either  for  himself  or  for  any  other  person,  will 
be  liable  to  a  penalty  of  not  exceeding  $300. 

Certificate          The  certificate  of  exemption  filed  by  an  individual  with 

Exem  tion       ^e  Payer  °^  mcome  shall  be  filed  with  the  return  of 

such  paying  debtor.     (Form  1007  Revised.) 


TAX    WITHHELD   AT   SOURCE 


35 


A  person  to  become  entitled  to  the  benefit  of  any  de- 
duction of  normal  tax  withheld  at  the  source  in  excess 
of  the  taxpayer's  liability  for  normal  tax,  or  for  refund 
of  amount  of  excess  tax  withheld,  must,  not  less  than 
thirty  days  prior  to  the  day  on  which  the  return  of  his 
income  is  due,  either : 

1.  "  File  with  the  person  who  is  required  to  withhold 
and  pay  tax  for  him,  a  true  and  correct  return  (Form 
1008  Revised)  of  his  gains,  profits,  and  income  from 
all  other  sources,  and  also  the  deductions  asked  for,  and 
the  showing  thus  made  shall  then  become  a  part  of  the 
return  to  be  made  in  his  behalf  by  the  person  required 
to  withhold  and  pay  the  tax,  or 

"  Likewise  make  application  for  deductions  to  the 
Collector  of  the  district  in  which  return  is  made  or  to 
be  made  for  him."  (Form  1008  Revised.) 

In  cases  where  the  allowable  deductions  are  known  at 
the  time  of  receipt  of  fixed,  annual,  or  periodical  income 
by  individuals,  whose  income  is  subject  to  withholding 
of  tax,  it  has  been  provided  by  T.  D.  2412,  released  for 
publication  December  15,  1916,  that  "the  person  en- 
titled to  and  receiving  such  income  may  file  with  the 
person,  firm,  or  corporation  making  the  payment,  a  cer- 
tificate (Form  1088),  under  penalty  for  false  claim,  stat- 
ing the  amount  of  such  deductions  and  making  a  claim 
for  an  allowance  of  the  same,  whereupon  there  shall  be 
no  withholding  upon  the  amount  of  such  claim  and  such 
certificate  shall  become  a  part  of  the  return  to  be  made 
in  behalf  of  the  person  making  the  claim.  When  because 
of  such  claim  no  tax  shall  have  been  withheld,  the  cer- 
tificate nevertheless  shall  be  forwarded,  with  letter  of 
transmittal,  to  the  Collector  of  Internal  Revenue  for  the 
District  in  which  the  withholding  agent  resides." 

On  rent  payable  to  an  individual  in  excess  of  $3,000 
per  annum,  the  normal  tax  must  be  withheld  at  the 
source  of  payment. 


36 


INCOME  TAX — LAW  AND   ACCOUNTING 


Where  a  tenant  rents  two  or  more  pieces  of  property 
and  the  total  rental  exceeds  $3,000  per  annum  the  normal 
tax  must  be  deducted  and  withheld,  less,  of  course,  the 
specific  exemption  if  claim  therefor  is  made  in  due  time. 

Interest  on          Interest  on  bank  balances  is  returnable  in  the  year 

Bank  credited  by  the  bank.     The  tax  on  such  interest,  how- 

Account  . 

ever,  even  m  excess  of  $3,000  per  annum,  is  not  subject 

to  be  withheld  at  the  source. 


Real  Estate 
Agent  Shall 
Not 
Withhold 


Tax 

Withheld 
Deductible 
by 
Individual 

Traveling 
Expenses 
Paid  by 
Salesmen 

Salesmen's 

Commissions 

Profit 

Sharing 

Bonuses 


A  real  estate  agent  collecting  rents  for  a  landlord  shall 
not  withhold  the  normal  tax  even  in  excess  of  $3,000. 
He  stands  in  the  position  of  the  landlord  and  receives 
collections  for  and  in  behalf  of  such  landlord.  (T.  D. 
2090.) 

All  taxes  withheld  at  the  source  shall  be  an  allowance 
in  the  return  of  the  person  on  whose  income  such  tax 
has  been  or  is  to  be  paid  at  the  source. 

Where  a  salary  is  paid  to  a  salesman  out  of  which 
he  is  required  to  pay  his  traveling  expenses,  the  tax 
should  not  be  withheld  at  the  source. 

Irregular  or  indefinite  income  as  to  amount  and  time 
of  accrual,  such  as  commissions  earned  by  a  salesman, 
are  not  subject  to  withholding  at  the  source,  except  where 
such  commission  can  be  definitely  determined,  as  in  the 
case  where  it  is  based  on  sales.  Wherever  a  commission 
is  definitely  determinable  the  normal  tax  should  be  with- 
held. 

Where  both  a  salary  and  commission  are  paid,  the  tax 
withheld  should  be  based  on  both  inclusive,  less  personal 
exemption  of  the  recipient.  This  is  true  also  of  amounts 
paid  as  "  profit-sharing  "  or  bonuses.  The  tax  on  the 
bonus  should  be  withheld  in  the  year  that  it  is  paid  or 
credited,  not  necessarily  in  the  year,  on  the  income  of 
which,  such  bonus  was  computed. 


TAX    WITHHELD   AT    SOURCE 


37 


Indemnity 
to 

Withholding 
Party 


Return  of 
Income  Tax 
Withheld 
at  Source 


Withholding 
Tax 

Nonresident 
Alien 


Provision 

for 

Exemption 

from 

Withholding 

Tax  on 

Income  of 

Nonresident 

Alien 

Corporations 


The  law  indemnifies  those  who  withhold  the  normal 
tax  at  the  source  against  liability  to  the  person  on  whose 
income  the  deduction  is  made. 

The  normal  tax  withheld  by  corporations  on  salaries 
and  compensation  of  officers  and  employees,  in  excess 
of  $3,000,  must  be  reported  in  Form  1042  Revised.  This 
return  should  accompany  the  return  of  annual  net  in- 
come. Failure  to  file  such  form  (1042  Revised)  makes 
the  corporation  subject  to  the  penalty  imposed  for  fail- 
ure to  make  return  in  due  time. 

Although  the  law  does  not  specifically  so  state,  it  may 
reasonably  be  inferred  from  a  consideration  of  all  the 
provisions  bearing  upon  the  withholding  of  tax  on  in- 
come of  nonresident  alien  individuals,  that  the  payers  of 
such  income  should  withhold  the  normal  tax  thereon 
irrespective  of  amount  paid,  except  in  the  case  of  divi- 
dends. 

The  law  provides  that  the  normal  tax  is  to  be  withheld 
at  the  source  of  payment  from  income  derived  within  the 
United  States  by  nonresident  alien  firms,  co-partnerships, 
companies,  corporations,  joint-stock  companies  or  asso- 
ciations and  insurance  companies  that  are  not  engaged 
in  business  or  trade  within  the  United  States  and  have 
no  office  or  place  of  business  therein. 

"  The  income  of  such  nonresident  alien  corporations, 
etc.,  which  is  subject  to  the  withholding  provisions  of  the 
law  is  that  derived  from  '  interest  on  bonds  and  mort- 
gages or  deeds  of  trust  or  similar  obligations  of  domestic 
or  other  resident  corporations,  joint-stock  companies  or 
associations,  and  insurance  companies/  regardless  of 
amount. 

"And  likewise  the  withholding  provisions  of  the  law 
'  shall  be  made  applicable  to  income  derived  from  divi- 
dends upon  the  capital  stock  or  from  the  net  earnings  of 
domestic  or  other  resident  corporations,  joint  stock  com- 


3S  INCOME  TAX — LAW  AND  ACCOUNTING 

panics  or  associations,  and  insurance  companies  by  non- 
resident alien  companies,  corporations,  joint-stock  com- 
panies or  associations,  and  insurance  companies  not  en- 
gaged in  business  or  trade  within  the  United  States  and 
not  having  any  office  or  place  of  business  therein,'  re- 
gardless of  amount. 

"  Including  and  from  and  after  September  9,  1916, 
and  to  and  including  December  31,  1916,  the  normal 
income  tax  will  be  withheld  from  such  income  at  the 
rate  of  1  per  cent  on  the  amount  thereof.  Including  and 
from  and  after  January  1,  1917,  the  normal  income  tax 
will  be  withheld  from  such  income  at  the  rate  of  2  per 
cent  on  the  amount  thereof. 

"  To  enable  debtor  corporations,  etc.,  in  the  United 
States  to  distinguish  between  nonresident  alien  corpora- 
tions, etc.,  which  have  and  those  which  do  not  have  *  any 
office  or  place  of  business  '  in  the  United  States  and  also 
to  enable  such  nonresident  alien  corporations,  etc.,  as 
have  an  '  office  or  place  of  business  '  in  the  United  States, 
to  claim  exemption  from  withholding  of  the  normal  in- 
come tax  at  the  source  on  their  income  from  sources 
within  the  United  States,  as  specified  by  the  statute,  a 
certificate  *  *  *  "  has  been  provided  known  as  Form 
1086. 

"  The  normal  income  tax  on  the  character  of  income 
herein  specified  and  payable  to  nonresident  firms,  copart- 
nerships, corporations,  etc.,  will  be  deducted,  withheld, 
and  paid  to  the  proper  officer  of  the  United  States  Gov- 
ernment authorized  to  receive  it,  unless  the  corporation, 
etc.,  entitled  to  the  payment  shall  file  *  *  *  "  such 
certificate  (under  penalty  for  false  claim)  and  only 
those  non-resident  firms,  corporations,  etc.,  which  have 
an  "  office  or  place  of  business  "  in  the  United  States 
can  use  such  certificate.  "  The  corporations,  etc.,  which 
are  permitted  to  use  the  certificate  herein  provided  are 
required  to  make  and  render  a  return  of  income  to  the 
collector  of  internal  revenue  for  the  district  in  which 


FARMS   AND   FARMERS 


39 


they  have  their  office  or  place  of  business     *     *     *. 
(T.  D.  2374  ) 


Farms  and 

Farmers 

Defined 


Income 
from  Farms 


Prepaid 
Farm 
Expenses 
Deductible 


Farming 
on  Shares 


Farm 
Expenses 
Deductible 
in  Year 
Paid 


VI.     FARMS  AND  FARMERS. 

"  The  term  '  farm'  as  herein  used  embraces  the  farm 
in  the  ordinary  accepted  sense,  plantations,  ranches,  stock 
farms,  dairy  farms,  poultry  farms,  fruit  farms,  truck 
farms  and  all  lands  used  for  similar  purposes;  and  foi 
the  purposes  of  this  decision  all  persons  who  cultivate, 
operate  or  manage  farms  for  gain  or  profit,  either  as 
owners  or  tenants,  are  designated  as  '  farmers.' 

"All  gains,  profits,  and  income  derived  from  the  sale 
or  exchange  of  farm  products,  whether  produced  on  a 
farm  or  purchased  and  resold  by  a  farmer,  shall  be  in- 
cluded in  the  return  of  income  for  the  year  in  which  the 
products  were  actually  marketed  and  sold;  and 

"All  allowable  deductions,  including  the  legitimate 
expenses  incident  to  the  production  of  that  year  or  future 
years,  may  be  claimed  in  the  return  of  income  for  the 
tax  year  in  which  the  right  to  such  deductions  shall  arise, 
although  the  products  to  which  such  expenses  and  de- 
ductions are  incidental  may  not  Rave  been  sold  or  ex- 
changed for  money;  or  a  money  equivalent,  during  the 
year  for  which  the  return  is  rendered. 

"  Rents  received  in  crop  shares  shall  likewise  be  re- 
turned as  of  the  year  in  which  the  crop  shares  are  re- 
duced to  money  or  a  money  equivalent,  and 

"Allowable  deductions,  likewise,  shall  be  claimed  in 
the  return  of  income  for  the  tax  year  to  which  they 
apply,  although  expenses  and  deductions  may  be  incident 
to  products  which  remained  unsold  at  the  end  of  the  year 
for  which  the  deductions  are  claimed. 


40 


INCOME  TAX — LAW  AND  ACCOUNTING 


Loss  in 
Value  of 
Farm 
Products 
Held  for 
Advance 

Live  Stock 
Purchased 


Loss  by 
Death  of 
Live  Stock 
Deductible 


Receipts  for 
Condemned 
Live  Stock 


Farm 

Machinery 
Not 
Deductible 

Depreciation 
Allowed 
on  Farm 
Property 


"  When  farm  products  are  held  for  favorable  market 
prices,  no  deduction  on  account  of  shrinkage  in  weight 
or  physical  value,  or  losses  by  reason  of  such  shrinkage 
or  deterioration  in  storage,  shall  be  allowed. 

"  Cost  of  stock  purchased  for  resale  is  an  allowable 
deduction  under  the  item  of  expense,  but  money  ex- 
pended for  stock  for  breeding  purposes  is  regarded  as 
capital  invested,  and  amounts  so  expended  do  not  con- 
stitute allowable  deductions  except  as  hereinafter  stated. 

"  Where  stock  has  been  purchased  for  any  purpose, 
and  afterwards  dies  from  disease  or  injury,  or  is  killed 
by  order  of  the  authorities  of  a  State,  or  the  United 
States,  and  the  cost  thereof  has  not  been  claimed  as  an 
item  of  expense,  the  actual  purchase  price  of  such  stock, 
less  any  depreciation  which  may  have  been  previously 
claimed,  may  be  deducted  as  a  loss.  Property  destroyed 
by  order  of  the  authorities  of  a  State,  or  of  the  United 
States,  may,  in  a  like  manner,  be  claimed  as  a  loss. 

"  But  if  reimbursement  is  made  by  a  State  or  the 
United  States,  in  whole  or  in  part,  on  account  of  stock 
killed  or  property  destroyed,  the  amount  received  shall 
be  reported  as  income  for  the  year  in  which  reimburse- 
ment is  made. 

"  The  cost  of  farm  machinery  is  not  an  allowable  de- 
duction as  an  item  of  expense,  but  the  cost  of  ordinary 
tools  may  be  included  under  this  item. 

"  Under  the  sixth  deduction  enumerated  in  Paragraph 
'  B/  providing  for  '  a  reasonable  allowance  for  the  ex- 
haustion, wear,  and  tear  of  property  arising  out  of  its 
use  or  employment '  *  *  *,  there  may  be  claimed  a 
reasonable  allowance  for  depreciation  on  farm  buildings 
(other  than  a  dwelling  occupied  by  the  owner),  farm 
machinery,  and  other  physical  property,  including  stock 
purchased  for  breeding  purposes ;  but  no  claim  for  depre- 


FARMS   AND   FARMERS 


41 


Farmers 
Books  of 
Account 


Farm 

Maintained 
Only  for 
Recreation 


elation  on  stock  raised  or  purchased  for  resale  will  be 
allowed. 

"  Farmers  who  keep  books,  according  to  some  ap- 
proved method  of  accounting,  which  clearly  show  the 
net  income,  may  prepare  their  returns  from  such  books, 
although  the  method  of  accounting  may  not  be  strictly  in 
accordance  with  the  provisions  of  this  decision. 

"A  person  cultivating  or  operating  a  farm,  for  recrea- 
tion or  pleasure,  on  a  basis  other  than  the  recognized 
principles  of  commercial  farming,  the  result  of  which  is 
a  continual  loss  from  year  to  year,  is  not  regarded  as  a 
farmer.  In  such  cases,  if  the  expenses  incurred  in  con- 
nection with  the  farm  are  in  excess  of  the  receipts  there- 
from, the  entire  receipts  from  sale  of  products  may  be 
ignored  in  rendering  a  return  of  income;  and  the  ex- 
penses incurred  being  regarded  as  personal  expenses  will 
not  constitute  allowable  deductions  in  the  return  of  in- 
come derived  from  other  sources."  (T.  D.  2153.) 


42 


CHAPTER  II 


Partners 


INCOME  TAX  AS  APPLIED  TO  PARTNERSHIPS 
VII.     GENERAL  PARTNERSHIPS 

Persons  conducting  business  in  partnership  shall  be 
liable  for  income  tax  only  in  their  individual  capacity. 


Returns  by         Partnerships  are  not  required  to  make  returns  except 
Partnerships   wjien  specifically  ordered  to  do  so  by  the  Collector  of 
Required        Internal  Revenue.     In  such  case,  the  return  should  be 
prepared  on  Form   1065. 

The  individual  members  of  the  partnership  are  re- 
quired to  include  in  their  returns  their  prorata  share  of 
the  earnings  of  partnerships  as  shown  by  the  books  of 
account,  whether  such  earnings  were  distributed  or  not. 


Income 

When 

Accrued 


"  It  is  held  that  the  income  from  a  partnership  accrues 
to  the  individual  partner  at  the  time  his  distributive  in- 
terest is  determined  and  reducible  to  possession.  In  the 
returns  of  income  made  by  individuals  for  the  calendar 
year,  therefore,  there  should  be  included  such  income 
accruing  from  the  business  of  partnerships  for  their 
business  years  as  may  have  been  definitely  ascertained 
by  means  of  a  book  balance,  whether  distributed  or  not. 
In  other  words,  members  of  partnerships  are  required 
to  make  returns  of  income  like  other  individuals  for  the 
calendar  year,  and  should  include  in  their  returns'' the 
net  proceeds  of  their  interest  in  partnership  profits  as- 
certained at  the  end  of  the  business  year  falling  within 
the  calendar  year  for  which  the  individual  return  is  being 
rendered."  (T.  D.  2090.) 

Partnership  Income  due  to  a  partnership  is  not  subject  to  the  with- 
Sub/ed:  to°  holding  of  normal  tax  at  the  source,  because  a  partner- 
Withholding  ship,  apart  from  its  members,  is  not  taxable. 


PARTNERSHIPS 


43 


Dividends 

to 

Partnership 


Credits  on 
Individual 
Returns  of 
Partners 


Partnership 
Expenses 

Life 

Insurance 
of  Partners 


Limited 
Partnership 


Partnership  earnings  must  include  dividends  on  the 
capital  stock  of  corporations,  joint-stock  companies,  or 
associations,  or  insurance  companies  owned  by  the  part- 
nership. 

From  the  net  distributive  interests  reported  by  the 
partners  "  there  shall  be  excluded  their  proportionate 
shares  received  from  interest  on  the  obligations  of  a 
State  or  any  political  or  taxing  subdivision  thereof,  and 
upon  the  obligations  of  the  United  States  and  its  pos- 
sessions, and  all  taxes  paid  to  the  United  States  or  to 
any  possession  thereof,  or  to  any  State,  county  or  taxing 
subdivision  of  a  State,  and  *  *  *  for  the  purpose 
of  computing  the  normal  tax  there  shall  be  allowed  a 
credit  *  *  *  for  their  proportionate  share  of  the 
profits  derived  from  dividends." 

None  of  the  expenses  of  a  partnership  shall  be  de- 
ducted from  the  return  of  net  income  of  an  individual. 

"  Premiums  paid  on  life  insurance  taken  out  by  a 
partnership  upon  the  lives  of  individual  members  of  such 
partnership,  constitute  allowable  deductions  in  ascertain- 
ing the  net  earnings  of  the  partnership.  However,  when 
such  policies  mature,  or  upon  the  death  of  the  insured 
partner,  the  amount  received  as  life  insurance  should  be 
included  in  the  gross  income  of  the  partnership."  (T.  D. 
2090.) 

VIII.     LIMITED  PARTNERSHIPS. 

In  the  administration  of  the  income  tax  law  it  has 
been  ruled  that  a  limited  partnership,  with  respect  to  its 
income,  is  subject  to  the  provisions  of  law  applicable  to 
corporations;  that  is  to  say,  a  limited  partnership  must 
make  its  return  on  the  blank  provided  for  corporations 
(Form  1031  Revised),  and  must  pay  the  normal  tax  as 
shown  thereby. 

Partnerships  are  required  to  prepare  and  file  lists  of 
the  persons  receiving  from  them  compensation  in  ex- 
cess of  $3,000  per  annum  (Form  1042  Revised). 


44  INCOME  TAX — LAW  AND  ACCOUNTING 

A  limited  partnership  is  one  having  one  or  more 
"  special  partners "  whose  liability  is  limited  to  the 
amount  invested.  It  is  created  by  complying  with  the 
State  laws  providing  for  that  form  of  partnership.  The 
usual  requirements  are  that  such  partnership  file  certain 
certificates  stating:  the  name  of  firm  under  which  the 
limited  partnership  is  to  be  conducted,  its  principal  place 
of  business,  the  general  nature  of  the  business  intended 
to  be  transacted,  the  names  of  all  general  and  special 
partners  and  their  respective  residences,  the  names  of 
the  special  partners  and  the  amount  of  capital  con- 
tributed by  each  of  thern,  and  the  time  that  such  partner- 
ship shall  commence  and  terminate. 

A  limited  partnership  can  only  be  created  by  comply- 
ing with  requirements  of  the  statute  of  the  State  under 
which  it  is  created. 

Profits  "  The  profits  of  limited  partnerships  making  returns 

Limited          m  ^ie  same  manner  as  corporations  make  returns  will 

Partnerships    ,  ••   •  *      *       V  ^  ,.  < 

be  treated  the  same  as  dividends  of  corporations  and 

will  be  returned  in  the  returns  of  individuals  in  the  same 
manner  as  are  dividends  upon  the  stock  of  corporations ; 
that  is  to  say,  the  dividends  received  from  such  limited 
partnerships  will  not  be  subject  to  the  normal  tax  in 
the  hands  of  the  members  of  the  partnership  receiving 
the  same."  (T.  D.  2137.) 


45 


CHAPTER  III. 

INCOME  TAX  AS  APPLIED  TO  CORPORATIONS. 
IX.     GENERAL  PROVISIONS. 

Income  of  The  Federal  income  tax  will  be  levied,  assessed,  col- 

O^anJzecf15  ^ecte(^'  anc^  Pa^  annually  upon  the  total  net  income  from 
in  United        all  sources,  received  in  the  preceding  calendar  or  fiscal 
year,1  by  every  corporation,  joint-stock  company  or  asso- 
ciation, or  insurance  company,  organized  in  the  United 
States. 

Income  of  The  tax  will  be  paid  annually  by  every  corporation, 

Corporations  Jomt-stock  company  or  association,  or  insurance  com- 
pany organized  under  the  laws  of  any  foreign  country, 
upon  the  total  net  income  received  from  all  sources 
within  the  United  States  in  the  preceding  year,  "  includ- 
ing interest  on  bonds,  notes  or  other  interest-bearing 
obligations  of  residents,  corporate  or  otherwise,  and 
including  the  income  derived  from  dividends  on  capital 
stock  or  from  net  earnings  of  resident  corporations,  joint- 
stock  companies  or  associations,  or  insurance  companies 
whose  net  income  is  taxable  under  this  title." 

Rate  The  tax  upon  the  income  of  corporations  is  2  per 

cent. 

Tax  Year  The  calendar  year  comprises  the  tax  year,  except  that 

corporations  may  designate  their  own  fiscal  year  by 
complying  with  certain  requirements  as  to  notice  to  the 
Collector,  etc.  See  page  47. 

Beginning  The  rate  of  2  per  cent,  is  applicable  to  the  entire  cal- 

endar year  of  1916  and  every  year  thereafter. 

1  A  return  for  the  fiscal  year  of  a  corporation,  when  other  than 
the  calendar  year,  is  only  acceptable  after  compliance  with  re- 
quirements in  connection  therewith.  See  page  47. 


46 


INCOME   TAX — LAW  AND   ACCOUNTING 


No  Specific 
Exemption 
of  Net 
Income 


Foreign 
Income 
Taxable 


Under  the  Corporation  Excise  Tax  of  1909,  net  in- 
come of  corporations  to  the  amount  of  $5,000  per  annum 
was  exempt.  No  such  provision  is  contained  in  the 
present  income  tax  law.  All  net  income  of  corporations 
is  subject  to  the  tax  of  2  per  cent. 

A  corporation  organized  in  the  United  States,  or  any 
possession  of  the  United  States,  must  include  in  its  re- 
turn income  from  all  sources,  whether  derived  in  the 
United  States,  its  possessions,  or  in  foreign  countries. 


Form  of 
Return 


Return  of 
Domestic 
Corporation 


Return  of 

Foreign 

Corporation 


Returns 

Must 

be  Made  for 

Calendar 

Year 

Unless 

Otherwise 

Authorized 

Due  Date 

of  Return 


X.     RETURNS  OF  CORPORATIONS. 

All  corporations,  domestic  and  foreign,  are  required 
to  make  returns  on  Form  1031  Revised,  except  insurance 
companies,  whose  returns  are  made  on  Form  1030  Re- 
vised. 

The  return  of  a  domestic  corporation  shall  be  made 
to  the  Collector  of  the  district  in  which  is  located  its 
principal  office,  or  where  its  books  of  account  and  other 
data  are  kept,  from  which  the  return  is  prepared. 

In  the  case  of  a  foreign  corporation,  the  return  should 
be  filed  with  the  Collector  of  the  district  in  which  is 
located'  its  principal  place  of  business  in  the  United 
States,  or  if  it  has  no  principal  place  of  business,  office 
or  agency  within  the  United  States,  then  with  the  Col- 
lector of  Internal  Revenue  at  Baltimore,  Maryland. 

Returns  made  for  any  period  other  than  a  calendar 
year,  except  where  the  corporation  has  given  due  notice 
to  the  Collector  of  Internal  Revenue,  in  compliance  with 
requirements  of  law,  will  not  be  accepted  by  the  Col- 
lector. 

All  returns  shall  be  filed  with  the  Collector  on  or 
before  the  1st  day  of  March  of  each  year  unless  the 
fiscal  year  of  the  corporation  has  been  designated  in  the 
manner  prescribed,  in  which  case  the  return  must  be 


RETURNS  OF    CORPORATIONS 


47 


When  Last 
Filing  Day 
Falls  on 
Sunday  or 
Legal 
Holiday 


Execution 
of  Returns 


When  Tax 
Payable 


Delayed 
Payment 
Penalty 


Returns  for 
Fiscal  Year 
of 
Corporation 


filed  within  sixty  days  after  the  close  of  such  designated 
fiscal  year. 

When  the  due  date  of  filing  a  return,  March  1st,  or 
where  an  extension  has  been  obtained,  the  last  day  of 
such  extended  time,  falls  on  Sunday  or  a  legal  holiday, 
the  last  due  date  will  be  the  day  next  following  such 
Sunday  or  legal  holiday.  In  case  the  return  is  trans- 
mitted by  mail  it  should  be  posted  in  ample  time  to  reach 
the  Collector's  office  "  under  ordinary  handling  of  the 
mails,  on  or  before  the  date  on  which  the  return  is  thus 
made  due  in  the  office  of  the  Collector." 

"  The  return  shall  be  sworn  to  by  the  President,  Vice- 
president  or  other  principal  officer,  and  by  the  Treasurer 
or  Assistant  Treasurer." 

Corporations  making  returns  on  the  basis  of  the  cal- 
endar year  will  be  notified  of  the  amount  of  their  assess- 
ments on  or  before  the  first  day  of  June  of  each  year 
and  the  amount  of  said  assessment  shall  be  paid  on  or 
before  the  fifteenth  day  of  June. 

To  any  sum  or  sums  due  and  unpaid  after  ten  days' 
notice  and  demand  thereof  by  the  Collector,  there  shall 
be  added  interest  at  the  rate  of  one  per  cent,  per  month 
upon  said  tax  from  the  time  the  same  became  due,  and 
a  further  penalty  of  five  per  cent,  on  the  amount  of 
the  tax  unpaid. 

A  corporation  whose  fiscal  year  is  not  the  calendar 
year,  may  make  its  return  on  the  basis  of  its  fiscal  year 
by  complying  with  prescribed  requirements.  The  desig- 
nated fiscal  year  must  end  on  the  last  day  of  some  month. 
The  corporation  shall  give  notice  to  the  Collector  of  the 
district  in  which  its  principal  office  is  located,  at  any 
time  not  less  than  30  days  prior  to  March  1st  of  the 
year  in  which  its  return  would  be  filed  if  made  upon 
the  basis  of  the  calendar  year.  Although  not  required 
under  the  law,  it  is  advisable  to  obtain  the  consent  of  the 


48 


INCOME   TAX — LAW  AND   ACCOUNTING 


Fiscal  Year 
When  Tax 
Payable 


Extension 
of  Time  to 
File 
Return 


Failure  to 
File  Return 
Penalty 


Collector  before  proceeding  to  file  returns  for  any  period 
other  than  the  calendar  year. 

Illustration :  The  fiscal  year  of  a  corporation  ends  on 
June  30th.  It  has  made  its  returns  say,  for  the  year 
1915  based  on  the  calendar  year  (January  1st  to  Decem- 
ber 31st,  1915).  In  order  now  (December  1st,  1916), 
to  obtain  permission  to  make  its  return  on  the  basis  of 
its  fiscal  year  (June  30th)  it  must  serve  notice  on  the 
Collector  not  later  than  30  days  prior  to  March  1st,  1917 
(on  or  before  January  29th,  1917).  Its  return  for  six 
months  ended  June  30th,  1916,  must  be  filed  on  or  be- 
fore March  1st,  1917,  and  the  return  for  year  ending 
June  30th,  1917,  must  be  filed  within  sixty  days  there- 
after (on  or  before  August  29th,  1917).  From  that  time 
on  its  annual  return  will  be  made  for  each  year  ending 
June  30th,  which  return  must  be  filed  within  60  days, 
i.  e.,  on  or  before  August  29th. 

The  tax  under  the  designated  fiscal  year  becomes  due 
and  payable  105  days  after  the  last  due  date  upon  which 
it  is  required  to  file  the  return,  which,  in  the  illustration 
cited,  would  be  December  12th  of  the  same  year  that  the 
return  is  made. 

Section  3176  of  the  revised  statute  provides  that:  "  If 
the  failure  to  file  a  return  or  list  is  due  to  sickness  or 
absence,  the  collector  may  allow  such  further  time,  not 
exceeding  thirty  days,  for  making  and  filing  the  return 
or  list  as  he  deems  proper."  Application  for  such  exten- 
sion should  be  made  to  the  Collector  on  or  before  the 
first  day  of  March. 

Section  14  (c)  provides,  further,  "  That  the  Commis- 
sioner of  Internal  Revenue  shall  have  authority,  in  the 
case  of  either  corporations  or  individuals,  to  grant  a 
reasonable  extension  of  time  in  meritorious  cases,  as  he 
may  deem  proper." 

In  case  of  failure  to  file  a  return  within  the  time  pre- 
scribed by  law  or  by  the  Collector,  the  Commissioner  of 


RETURNS  OF   CORPORATIONS 


49 


Internal  Revenue  shall  add  fifty  per  cent,  of  the  amount 
of  the  tax.  When  a  return  is  voluntarily,  and  without 
notice  from  the  Collector,  filed  after  the  due  time,  and  it 
is  shown  that  the  failure  to  file  the  return  was  due  to  a 
reasonable  cause  and  not  to  willful  neglect,  no  such  addi- 
tion shall  be  made  to  the  tax. 

In  case  a  false  or  fraudulent  return  is  willfully  made, 
the  Commissioner  of  Internal  Revenue  shall  add  to  the 
tax  one  hundred  per  cent,  of  its  amount.  Section  3176 
of  the  revised  statute  further  provides  that  "  The  amount 
so  added  to  any  tax  shall  be  collected  at  the  same  time 
and  in  the  same  manner  and  as  part  of  the  tax  unless 
the  tax  has  been  paid  before  the  discovery  of  the  neglect, 
falsity,  or  fraud,  in  which  case  the  amount  so  added 
shall  be  collected  in  the  same  manner  as  the  tax." 

Section  18  of  the  income  tax  law  further  states  that 
"  Any  individual  or  any  officer  of  any  corporation,  joint- 
stock  company  or  association  or  insurance  company  re- 
quired by  law  to  make,  render,  sign  or  verify  any  return 
who  makes  any  false  or  fraudulent  return  or  statement 
with  intent  to  defeat  or  evade  the  assessment  required  by 
this  title  to  be  made  shall  be  guilty  of  a  misdemeanor, 
and  shall  be  fined  not  exceeding  $2,000  or  be  imprisoned 
not  exceeding  one  year,  or  both,  in  the  discretion  of  the 
court,  with  the  costs  of  prosecution. 

Section  14  (c)  contains  the  provision  that  "  If  any  of 
the  corporations,  joint-stock  companies  or  associations, 
or  insurance  companies  aforesaid  shall  refuse  or  neglect 
to  make  a  return  at  the  time  or  times  hereinbefore  speci- 
fied in  each  year,  or  shall  render  a  false  or  fraudulent 
return,  such  corporation,  joint-stock  company  or  associa- 
tion, or  insurance  company  shall  be  liable  to  a  penalty  of 
not  exceeding  $10,000." 

In  cases  of  refusal  or  neglect  to  make  return,  and 
in  cases  of  erroneous,  false  or  fraudulent  returns,  the 
Commissioner  of  Internal  Revenue  shall,  upon  the  dis- 


50 


INCOME  TAX — LAW  AND  ACCOUNTING 


Second 
Assessment 

Recovery 
of  Amount 
Paid 


covery  thereof,  at  any  time  within  three  years  after  such 
return  is  due,  make  a  return  upon  information  obtained 
as  provided  for  by  existing  law.  The  assessment,  based 
upon  a  return  so  made,  shall  become  due  and  payable 
immediately  upon  notification  of  the  amount  thereof. 

"  When  a  second  assessment  is  made  in  case  of  any 
list,  statement,  or  return,  which  in  the  opinion  of  the 
collector  or  deputy  collector  was  false  or  fraudulent,  or 
contained  any  understatement  or  undervaluation,  no  tax 
collected  under  such  assessment  shall  be  recovered  by 
any  suit  unless  it  is  proved  that  the  said  list,  statement, 
or  return  was  not  false  nor  fraudulent  and  did  not  con- 
tain any  understatement  or  undervaluation ;  but  this  sec- 
tion shall  not  apply  to  statements  or  returns  made  or  to 
be  made  in  good  faith  under  the  laws  of  the  United 
States  regarding  annual  depreciation  of  oil  or  gas  wells 
and  mines."  (Section  3225,  revised  statute.) 

The  contents  of  returns  of  net  income  constitute  a 
public  record,  open  to  inspection  "  only  upon  the  order 
of  the  President  under  rules  and  regulations  prescribed 
by  the  Secretary  of  the  Treasury  and  approved  by  the 
President." 

Designated         A  corporation  that  has  designated  its  own  fiscal  year 

Year  shall  Pa^  a  tax  on  ^ie  Pr°P°rtion  of  the  total  net  income 

Apportioning   returned  for  the  fiscal  year  ending  prior  to  December  31, 

Ior°l9l6          1916>  which  the  Period  between  January   1,   1916,  and 

the  end  of  such  fiscal  year  bears  to  the  whole  of  such 

fiscal  year;  that  is  to  say,  a  corporation,  the  fiscal  year 

of  which  ends  on  November  30,  1916,  shall  pay  a  tax  of 

1  per  cent,  (under  the  old  law)  on  1/12  of  its  net  income 

of  said  fiscal  year,   for  the  month  of  December,   1915, 

and  2  per  cent,  on  11/12  of  said  income,  for  period  from 

January  1  to  November  30,   1916.     Thereafter  it  will 

pay  at  the  rate  of  2  per  cent. 


Publicity 
of  Returns 


RETURNS  OF    CORPORATIONS 


51 


Corporations 
Incompletely 
Organized 


AH  Existing 
Corporations 
Must  Make 
Returns 


A  corporation  which  has  not  been  completely  organ- 
iJd,  that  is  to  say,  has  not  accepted  the  charter  granted 
it,  and  has  transacted  no  business,  is  relieved  of  the 

necessity  of  making  a  return  as  a  corporation  until  its 

organization  has  been  completed. 

The  fact  that  a  corporation  has  received  no  income 
no  excuse  for  failure  to  make  return.     The  duty  to 

make  a  return  depends  upon  corporate  existence  and  not 

upon  receipt  of  income. 

Colons       In  the  event  that  *  sh°uW  not  be  possible  for  a  cor- 
Maintaining    poration  to  obtain  from  its  foreign  branches  the  neces- 

BrSes  sary  data  from  which  to  make  a  complete  and  accurate 
report,  it  is  advisable  to  prepare  and  file  a  tentative  re- 
turn showing,  in  so  far  as  obtainable,  the  income  from 
all  operations  of  such  company,  to  which  should  be  at- 
tached a  memorandum  to  the  effect  that,  by  reason  of 
inability  to  obtain 'the  necessary  information  in  due  time 
the  income  reported  does  not  include  income  from  all 
sources.  Such  report  should  be  marked  "  Tentative  Re- 
When  the  necessary  data  is  received  an  amended 
return,  so  marked,  should  be  filed,  and  the  assessment 
will  then  be  fixed  thereon. 

Collectors  of  Internal  Revenue  are  permitted  to  accept 
tentative  returns  in  cases  other  than  that  mentioned 
above  (foreign  branches)  where  true  returns  cannot  be 
rendered  in  due  time  or  within  the  extended  time  as 
provided  by  law.  The  practice,  however,  should  only 
be  resorted  to  when  it  is  unavoidable. 


Returns  of 

Holding 

Companies 


"  In  a  case  wherein  a  holding  company  actually  takes 
up  each  month  on  its  books  its  proportionate  share  of 
the  earnings  of  the  underlying  companies,  such  holding 
company  will  be  required  to  include  in  its  gross  income 
the  amounts  thus  taken  up  regardless  of  the  fact  that 
the  same  may  not  have  been  actually  paid  to  it  in  cash. 
The  fact  that  the  underlying  companies  credit  to  the 


52 


INCOME   TAX — LAW   AND   ACCOUNTING 


Returns  of 
Subsidiary 
Companies 


Receivers, 

Trustees, 

Assignees 


holding  company  the  amount  of  earnings  to  which  it  is 
entitled  on  the  basis  of  the  stock  it  holds,  together  with 
the  fact  that  the  holding  company  takes  up  on  its  books 
the  amount  thus  credited;  renders  it  incumbent  upon  the 
holding  company  to  return  these  amounts  as  income,  re- 
gardless of  the  fact  that  the  underlying  companies  needed 
these  earnings  and  used  them  in  making  extensions  and 
improvements  and  in  furtherance  of  their  business.  Ex- 
penditures for  such  extensions  and  improvements  being 
chargeable  to  the  property  account  of  the  subsidiary 
companies  are  not  deductible  from  the  gross  income  and 
will  therefore  not  have  the  effect  to  reduce  the  earnings 
to  their  respective  shares  of  which  the  stockholders  are 
entitled."  (Supplement  to  Black  on  Income  Taxes.) 

The  existence  of  a  corporation  is  sufficient  to  compel 
the  rendering  of  a  return  of  net  income.  The  fact  that 
a  subsidiary  company  has  had  no  income  and  no  expenses 
does  not  excuse  it  from  making  a  return.  In  case  there 
has  been  neither  income  nor  expenses,  the  return  should 
specifically  state  such  facts. 

It  is  quite  usual  for  a  subsidiary  company  to  keep  its 
books  and  maintain  its  principal  office  at  a  place  other 
than  where  its  operations  are  conducted.  In  such  case, 
as  where  the  subsidiary  company's  office  is  maintained 
in  the  place  where  the  holding  company  has  its  office, 
the  return  should  be  made  in  the  district  of  the  place 
where  its  books  of  account  are  kept. 

It  is  customary  for  subsidiary  companies  to  transmit 
to  the  parent  company  all  of  its  earnings  after  deduct- 
ing its  expenses.  Such  income  received  by  the  parent 
company  is  construed  to  be  dividends  by  the  subsidiary 
company,  subject  to  tax  in  the  return  of  the  parent  com- 
pany, as  well  as  in  the  return  of  the  subsidiary. 

Receivers  and  trustees  in  bankruptcy,  and  assignees, 
who  are  operating  the  property  or  business  of  corpora- 
tions that  are  subject  to  the  income  tax  must  make  re- 


EXEMPT   ORGANIZATIONS  53 

turns  of  net  income  for  such  corporations.  Corporations 
in  the  hands  of  receivers,  trustees  or  conservators  are 
subject  to  the  income  tax  and  must  make  returns. 

Returns  It  has  been  ruled  that  corporations  required  to  keep 

Commerce      their  books  according  to  a  uniform  system  of  accounting 

Corporations  prescribed  by  the  Interstate  Commerce  Commission,  may 

supply  the  information  called  for  by  Form  1031  "  by 

classes  rather  than  giving  the  items  in  detail,  classifying 

the  income  and  expenditures  in  the  same  manner  as  Is 

required  as  to  these  items  by  the  Interstate  Commerce 

Commission." 

Books  of  "A  corporation,  joint-stock  company  or  association, 

Corporations  or  insurance  company,  keeping  accounts  upon  any  basis 
other  than  that  of  actual  receipts  and  disbursements, 
unless  such  other  basis  does  not  clearly  reflect  its  income, 
may,  subject  to  regulations  made  by  the  Commissioner 
of  Internal  Revenue,  with  the  approval  of  the  Secretary 
of  the  Treasury,'  make  its  return  upon  the  basis  upon 
which  its  accounts  are  kept,  in  which  case  the  tax  shall 
be  computed  upon  its  income  as  so  returned."  (See 
Chapter  V,  "  Preparation  of  Income  Tax  Return,"  page 
86.) 

Appreciation        An  increase  in  the  book  value  of  assets  to  conform 
Income  w*tn  appraisal  values,  or  for  any  other  purpose,  does 

not  render  such  increase  taxable  as  income. 

XL    EXEMPT  ORGANIZATIONS. 

Exempt  Xhe   following  classes  of  corporations  and  organiza- 

tions"1'         tions  are  exempt  from  requirements  of  the  income  tax 

law  except  the  withholding  of  normal  tax  at  the  source, 

and  reporting  and  paying  the  same  to  the  Government. 

(See:  Exempt  corporations  subject  to  withholding,  page 

55.) 

First — Labor,  agricultural  or  horticultural  organization; 

Second — Mutual  savings  bank  not  having  a  capital  stock 
represented  by  shares; 


54  INCOME  TAX — LAW  AND  ACCOUNTING 

Third — Fraternal  beneficiary  society,  order,  or  associa- 
tion, operating  under  the  lodge  system  or  for  the 
exclusive  benefit  of  the  members  of  a  fraternity 
itself  operating  under  the  lodge  system,  and  pro- 
viding for  the  payment  of  life,  sick,  accident,  or 
other  benefits  to  the  members  of  such  society,  order, 
or  association  or  their  dependents; 

Fourth — Domestic  building  and  loan  association  and  co- 
operative banks  without  capital  stock  organized  and 
operated  for  mutual  purposes  and  without  profit; 

Fifth — Cemetery  company  owned  and  operated  exclu- 
sively for  the  benefit  of  its  members; 

Sixth — Corporation  or  association  organized  and  op- 
erated exclusively  for  religious,  charitable,  scientific, 
or  educational  purposes,  no  part  of  the  net  income 
of  which  inures  to  the  benefit  of  any  private  stock- 
holder or  individual; 

Seventh — Business  league,  chamber  of  commerce,  or 
board  of  trade,  not  organized  for  profit  and  no  part 
of  the  net  income  of  which  inures  to  the  benefit  of 
any  private  stockholder  or  individual; 

Eighth — Civic  league  or  organization  not  organized  for 
profit  but  operated  exclusively  for  the  promotion 
of  social  welfare ; 

Ninth — Club  organized  and  operated  exclusively  for 
pleasure,  recreation,  and  other  nonprofitable  pur- 
poses, no  part  of  the  net  income  of  which  inures  to 
the  benefit  of  any  private  stockholder  or  member; 

Tenth — Farmers,  or  other  mutual  hail,  cyclone,  or  fire 
insurance  company,  mutual  ditch  or  irrigation  com- 
pany, mutual  or  co-operative  telephone  company;  or 
like  organization  of  a  purely  local  character;  the 
income  of  which  consists  solely  of  assessments,  dues, 
and  fees  collected  from  members  for  the  sole  pur- 
pose of  meeting  its  expenses; 


EXEMPT   ORGANIZATIONS 


55 


Eleventh  —  Farmers',  fruit  growers',  or  like  association, 
organized  and  operated  as  a  sales  agent  for  the  pur- 
pose of  marketing  the  products  of  its  members  and 
turning  back  to  them  the  proceeds  of  sales,  less  the 
necessary  selling  expenses,  on  the  basis  of  the  quan- 
tity of  produce  furnished  by  them; 

Twelfth  —  Corporation  or  association  organized  for  the 
exclusive  purpose  of  holding  title  to  property,  col- 
lecting income  therefrom,  and  turning  over  the  en- 
tire amount  thereof,  less  expenses,  to  an  organiza- 
tion which  itself  is  exempt  from  the  tax  imposed 
by  this  title;  or 

Thirteenth  —  Federal  land  banks  and  national  farm-loan 
associations  as  provided  in  section  twenty-six  of  the 
Act  approved  July  seventeenth,  nineteen  hundred 
and  sixteen,  entitled  "  An  act  to  provide  capital 
for  agricultural  development,  to  create  standard 
forms  of  investment  based  upon  farm  mortgage,  to 
equalize  rates  of  interest  upon  farm  loans,  to  fur- 
nish a  market  for  United  States  bonds,  to  create 
Government  depositaries  and  financial  agents  for 
the  United  States,  and  for  other  purposes." 

Fourteenth  —  Joint-stock  land  banks  as  to  income  derived 
from  bonds  or  debentures  o-f  other  joint-stock  land 
banks  or  any  Federal  land  bank  belonging  to  such 
joint-stock  land  bank. 

Exempt  Under  the  language  of  the  income  tax  act  of  1913  it 

Subject^115  was  he^  that  exemPt  corporations  and  organizations 
Withholding  were  exempt  from  all  provisions  of  the  law.  Under  the 
present  law,  however,  enacted  September  8,  1916,  it  has 
been  ruled  by  the  Commissioner  of  Internal  Revenue  that 
the  fourteen  different  kinds  of  exempt  corporations  and 
organizations  named  in  the  law  are  relieved  only  from 
the  tax  on  their  income,  and  "  that  said  corporations  and 
organizations  are  required  to  answer  under  all  the  other 
provisions  of  the  statute  as  to  withholding  and  making 
returns  of  tax  withheld." 


56 


INCOME   TAX — LAW   AND   ACCOUNTING 


Organiza- 
tions 
Doubtful 
as  to 
Exemption 


Foreign 
Organiza- 
tions 


Close 
Corporation 


In  all  cases  where  there  is  a  question  of  doubt  as  to 
whether  an  organization  is  or  is  not  exempt,  it  is  rec- 
ommended that  a  special  ruling  be  obtained  from  the 
Commissioner  of  Internal  Revenue.  The  application  for 
such  ruling  should  be  accompanied  by  an  affidavit  stat- 
ing: 

(a)  The  purpose  and  nature  of  the  organization 

(b)  The  source  erf  its  income 

(c)  The  disposition  of  its  income 

(d)  Whether  or  not  any  of  its  net  income  will  inure 

to  the  benefit  of  any  private  stockholder  or 
individual. 

It  has  been  ruled  that  foreign  as  well  as  domestic  cor- 
porations and  organizations  enumerated  in  the  exempt 
list  are  included  therein. 

A  so-called  "  close  corporation,"  which  usually  consists 
of  members  of  a  family,  is  not  such  corporation  as  is  ex- 
empt from  the  requirements  of  the  income  tax  law. 


Net 
Income 


Gross 
Income 


XII.     INCOME  OF  CORPORATIONS. 

The  term  "  net  income  "  as  used  in  the  income  tax  law 
with  respect  to  corporations,  may  be  denned  as  the 
"  gross  income  "  less  deductions  allowed  by  law. 

"  Gross  income  of  manufacturing  companies  shall  con- 
Manufactur-  sist  of  the  total  sales  of  manufactured  goods  during  the 

in2  year  covered  by  the  return,  increased  or  decreased  by 

Corporations    J  .  ,  ,        ,      .  -    .       J 

the  gain  or  loss  as  shown  by  the  inventories  of  finished 

and  unfinished  products,  raw  material,  etc.,  at  the  be- 
ginning and  end  of  the  year.  To  this  amount  should  be 
added  the  income,  gains,  or  profits  from  all  other  sources 
as  shown  by  the  books  of  account."  (Art.  104,  Reg. 
331)  (See:  Manufacturing  Corporation  operating  Cost- 
system,  page  110.) 


1  Refers  to  regulations  issued  by  the  Treasury  Department. 


INCOME   OF   CORPORATIONS  57 

Gross  "  Gross  income  of  mercantile  companies  shall  include 

Mercantile  the  tota^  merchandise  sales  during  the  year,  increased 
Corporations  or  decreased  by  the  gain  or  loss  as  shown  by  the  inven- 
tories of  merchandise  at  the  beginning  and  end  of  the 
year  for  which  the  return  is  made ;  to  this  amount  should 
be  added  the  income,  gains,  or  profits  derived  from  all 
other  sources  as  shown  by  the  books  of  account."  (Art. 
105,  Reg.  33.) 

Gross  "  Gross  income  of  miscellaneous  corporations  consists 

Miscel-          °*  ^e  tota*  revenue  derived  from  the  operation  and  man- 

laneous  _        agement  of  the  business  and  property  of  the  corporation 

making  the  return,  together  with  all  amounts  of  income, 

including  the  income,  gains,  or  profits   from  all  other 

sources,  as  shown  by  the  books  of  account."     (Art.  106, 

Reg.  33.) 

Gross  "  In  the  case  of  a  large  contracting  company,  which 

Contracting  nas  numerous  uncompleted  contracts  which  probably,  in 
Corporations  some  cases,  run  for  periods  of  several  years,  there  does 
not  appear  to  be  any  objection  to  such  corporation  pre- 
paring its  return  in  such  manner  that  its  gross  income 
will  be  arrived  at  on  the  basis  of  completed  work — 
that  is  to  say,  on  jobs  which  have  been  finally  completed 
and  payments  made  during  the  year  in  which  the  return 
is  made.  If  the  gross  income  is  arrived  at  in  this  method, 
the  deductions  from  gross  income  should  be  limited  to 
the  expenditures  made  on  account  of  such  completed 
contracts."  (T.  D.  2161.) 

Gross  "  It  will  be  noted  from  these  definitions  that  the  gross 

From1!!!        income  embraces  not  only  the  operating  revenues,  but  also 

Sources          income,  gains,  or  profits  from  all  other  sources,  such  as 

rentals,    royalties,    interest,    and   dividends    from   stock 

owned    in    other    corporations     *     *     *,     also    profits 

made  from  the  sale  of  assets,  investments,  etc."     (Art. 

107,  Reg.  33.) 


58 


INCOME   TAX — LAW  AND   ACCOUNTING 


Gross 
Income 
Insurance 
Companies 


Mutual 
Companies 


Dividends 
Received  by 
Corporation 


Dividends 
Payable  in 
Securities 


Profit  on 
Sales  of 
Capital 
Assets 


"  Gross  income  of  insurance  companies  consists  of  the 
total  revenue  derived  from  the  operation  of  the  business^ 
including  income,  gains,  or  profits  from  all  other  sources, 
as  shown  by  the  entries  on  the  books  of  account  within 
the  calendar  or  fiscal  year  for  which  the  return  is  made, 
except  as  modified  by  the  express  exemptions  of  the 
articles  which  apply  to  mutual  fire,  mutual  marine,  and 
life  insurance  companies."  (Art.  97,  Reg.  33.) 

Mutual  associations  or  companies,  such  as,  fire,  em- 
ployers' liability,  workmen's  compensation,  casualty  in- 
surance companies,  that  require  their  members  to  make 
premium  deposits  to  provide  for  losses  and  expenses, 
are  not  required  to  return  as  income  any  portion  of  the 
premium  deposits  returned  to  policyholders.  Income 
from  all  other  sources,  however,  including  that  received 
from  its  members  as  premium  deposits,  retained  by  the 
companies  for  purposes  other  than  the  payment  of  losses 
and  expenses  and  reinsurance  reserves,  is  returnable  as 
income. 

The  income  received  by  corporations  in  the  form  of 
dividends  of  other  corporations  is  subject  to  tax  in  the 
hands  of  the  company  paying  the  same,  as  a  part  of  its 
net  earnings,  as  well  as  in  the  hands  of  the  corporation 
receiving  the  same.  Hence,  there  is  a  double  tax  on  divi- 
dends paid  to  a  corporate  stockholder. 

Dividends  may  be  declared  payable  in  cash  or  the 
equivalent  of  cash.  Where  dividends  are  declared  pay- 
able in  securities  of  another  corporation  or  of  a  foreign 
government,  the  value  placed  upon  such  securities  should 
be  the  fair  cash  market  value  thereof  as  at  the  time  the 
dividend  is  declared. 

Profit  or  income  from  the  sale  of  capital  assets  is  sub- 
ject to  the  income  tax  and  must  be  included  in  the  return 
of  corporations. 


INCOME   OF   CORPORATIONS  59 

Sales  of  For  the  purpose  of  ascertaining  the  gain  derived  from 

Acquired  the  sa^e  or  otner  disposition  of  property,  real,  personal 

Prior  to  or  mixed,  acquired  before  March  1,  1913,  the  fair  market 

March  1st,  price  Qr  value  of  such  property  as  of  March  1,  1913,  shall 

be  the  basis  for  determining  the  amount  of  such  gain 
derived. 

For  method  of  computing  profit  or  loss  on  properties 
acquired  prior  to  March  1,  1913,  see  page  23.; 

Interest  on  Interest  received  on  sinking  funds  or  from  any  in- 
Sinking  vestment  of  reserve  funds,  shall  be  accounted  for  as 
Funds 

income. 

Income  of  A  real  estate  development  corporation,  ordinarily,  does 
Development  not  realize  a  profit  until  the  property  or  properties  of 
Corporation  such  company  have  been  developed.  During  the  time 
of  such  development  certain  carrying  charges  are  in- 
curred, as  interest,  taxes,  insurance,  etc.  Inasmuch  as 
it  would  work  an  injustice  to  compel  such  company  to 
deduct  carrying  charges  as  current  expenses  during  the 
period  of  development,  when  the  property  derives  no 
profit,  it  has  been  ruled  that  all  such  carrying  charges 
may  be  added  to  the  cost  of  the  property.  During  the 
time  of  development  the  income  from  the  sale  of  lots, 
or  parcels,  may  be  deducted  from  the  total  cost  of  land, 
including  the  initial  cost  plus  carrying  charges  and  the 
corporation  will  return  no  profit  until  the  amount  of 
sales,  or  contracts  of  sales,  exceed  the  prime  cost  of 
property  plus  carrying  charges. 

In  the  case  of  a  contract  of  sale  of  land  on  the  in- 
stallment plan  of  payments  by  a  development  company, 
the  gross  amount  to  be  paid  by  the  installment  purchaser 
is  deemed  income  and  is  returnable,  for  income  tax  pur- 
poses in  the  year  that  the  contract  of  sale  is  made. 
Should  the  purchaser  default  in  payment,  the  amount  of 
such  default  may  be  deducted  as  a  loss  sustained  by  rea- 
son thereof. 


60 


INCOME   TAX — LAW  AND   ACCOUNTING 


Income 
Instalment 
Businesses 
Generally 


Premium 

Sale 

of  Capital 

Stock 


Assessment 
of  Paid-up 
Capital 
Stock  Not 
Income 


Corporations  and  individuals  selling  merchandise  on 
the  installment  plan,  or  on  "  lease  contracts/'  are  required 
to  make  their  returns  of  gross  income  on  the  basis  of  the 
gross  amount  of  contracts  of  sales  made  during  the  year. 
In  other  words,  the  gross  amount  to  be  paid  by  the  cus- 
tomer under  a  contract  for  the  sale  or  "  leasing  "  of  mer- 
chandise is  construed  to  be  the  amount  on  which  the 
gross  profit  is  computed  for  income  tax  purposes.  Uncol- 
lected  accounts,  less  salvage  value  of  goods  returned,  if 
any,  may  be  charged  at  the  end  of  the  year  as  bad  debts. 
This  principle  is  applicable  to  all  kinds  of  installment 
businesses,  as,  for  example,  piano,  furniture,  clothing 
concerns,  etc. 

"  The  amount  received  by  a  corporation  for  the  orig- 
inal issue  and  sale  of  its  capital  stock  is  held  to  be  the 
capital  of  the  corporation.  In  cases  where  the  stock, 
as  originally  issued,  is  sold  at  a  price  greater  or  less 
than  the  par  value,  neither  the  premium  nor  the  discount 
will  be  taken  into  account  in  determining  the  net  income 
of  the  corporation  for  the  year  in  which  the  stock  is  sold. 
This  is  purely  a  capital  transaction  and  the  income  is 
neither  increased  nor  decreased  by  reason  of  the  sale, 
per  se,  of  the  stock  at  a  price  greater  or  less  than  its  par 
value."  (T.  D.  2090.) 

Where  a  corporation  sustains  a  deficit  (impairment 
of  capital)  at  the  close  of  a  year,  which  the  stockholders 
propose  to  make  good  by  voluntary  contribution,  such 
contribution  or  assessment  is  not  income  to  the  corpora- 
tion. In  a  letter  to  Dorman  &  Dana,  New  York,  dated 
February  21,  1916,  Commissioner  W.  H.  Osborn  ex- 
pressed himself  as  follows :  "  It  is  therefore  the  present 
opinion  of  this  office  that  the  amounts  paid  by  the  stock- 
holders pursuant  to  this  so-called  voluntary  assessment, 
are  to  all  intents  and  purposes,  if  not  in  fact,  additional 
payments  for  the  stock  which  they  hold,  that  is  to  say, 
such  payments  are  simply  an  addition  to  the  capital 


DEDUCTIONS   ALLOWED   CORPORATIONS 


61 


stock  of  the  company.  Since  amounts  paid  for  or  on 
account  of  capital  stock  issued  do  not  constitute  income 
within  the  meaning  of  the  Federal  income  tax  law,  it 
is  held  that  these  payments  represent  voluntary  assess- 
ments upon  the  stock  held  by  the  individual  stockholders 
and  do  not  constitute  income  to  be  returned  for  the  pur- 
pose of  the  income  tax." 


XIII.     DEDUCTIONS  ALLOWED  TO  CORPORATIONS. 

Deductions         "  All  the  ordinary  and  necessary  expenses  paid  within 
Corporations   t^ie  vear  m  ^e  mamtenance  and  operation  of  its  busi- 
ness and  properties  "  are  deductible  from  gross  income 
of  corporations. 

All  losses  actually  sustained  and  charged  off  within 
the  year,  not  compensated  for  by  insurance  or  otherwise, 
are  deductible  item's. 

Loss  Losses  not  compensated  by  insurance  must  be  deducted 

Qnly^n          from  the  return  of  net  income  for  the  year  in  which 

Year  the  loss  was  sustained.     This  ruling  has  been  upheld  by 

Sustained  .  .       ,   .  ,.          f          , 

the  courts  and  is  strictly  enforced. 


Deductible 


Profit  or 

Loss  on 

Property 

Acquired 

Before 

March  I, 

1913 


Depreciation 
Deductible 


For  the  purpose  of  computing  the  profit  or  loss  from 
the  sale  of  property  of  a  corporation,  acquired  prior  to 
the  incidence  of  the  law,  March  1st,  1913,  such  proper- 
ties shall  be  valued  as  of  that  time  at  the  fair  market 
price  thereof.  This  applies  to  both  real  and  personal 
property. 

A  reasonable  allowance  for  the  exhaustion,  wear  and 
tear  of  physical  properties  of  a  corporation  arising  out 
of  its  use  or  employment  in  the  business  or  trade  is  de- 
ductible in  the  year  that  such  depreciation  is  sustained. 
The  amount  deducted  must  be  actually  charged  off  upon 
the  books  of  the  corporation.  (See  "  Depreciation,"  page 
68.) 


62 


INCOME  TAX — LAW  AND  ACCOUNTING 


Depletion 
of  Oil  and 
Gas  Wells 

Depletion 
of  Mines 


Depletion 
of  Timber 
Lands 


Bad  Debts 


Reserves 
for  Bad 
Debts 


This  deduction  is  considered  in  Chapter  IV  on 
Depreciation,  page  75.) 

Under  the  amended  law  the  provision  of  the  income 
tax  act  of  1913,  limiting  the  charge  for  depletion  of 
mines  to  "  5  per  cent,  of  the  gross  value  at  the  mine  of 
the  output  for  the  year  "  has  been  repealed,  and  there 
has  been  substituted  the  provision  that  a  reasonable  al- 
lowance for  depletion  thereof  will  be  permitted,  "  not 
to  exceed  the  market  value  in  the  mine  of  the  product 
thereof,  which  has  been  mined  and  sold  during  the  year 
for  which  the  return  and  computation  are  made  "  under 
rules  and  regulations  to  be  prescribed  by  the  Secretary 
of  the  Treasury. 

Inasmuch  as  the  operating  conditions  of  mines  are  so 
materially  different,  the  rate  of  depletion  should  be  com- 
puted on  a  basis  that~will  provide  for  the  particular  re- 
quirements of  each  case.  The  rules  and  regulations  men- 
tioned in  the  law  may  be  had  upon  application  to  the 
Commissioner  of  Internal  Revenue,  Washington,  D.  C. 

The  rate  of  depreciation  on  timber  lands  by  reason 
of  depletion  of  such  properties,  may  be  such  as  to  return 
to  the  corporation,  or  individual,  when  the  timber  has 
been  exhausted,  the  capital  originally  invested,  or  in 
case  of  purchase  made  prior  to  March  1st,  1913,  the 
fair  market  value  as  of  that  date. 

The  income  tax  law  does  not  provide  specifically,  with 
respect  to  corporations,  for  the  deduction  of  bad  debts 
or  uncollectible  accounts.  The  officers  of  the  Govern- 
ment, however,  having  the  administration  of  the  law  in 
charge,  have  ruled  that  the  same  may  be  deducted  as 
losses.  (See  page  103.) 

To  provide  for  doubtful  and  anticipated  bad  debts, 
by  establishing  a  reserve  for  that  purpose,  has  always 
been  considered  good  accounting  practice,  but  such  re- 
serve is  not  deductible  from  an  income  tax  return.  Ac- 


DEDUCTIONS   ALLOWED    CORPORATIONS 


63 


Sinking 

Fund 

Reserves 


Reserve 
for 

Discounts 
on  Sales 


Interest 
Deductible 


counts  receivable,  to  be  deductible  from  income,  must 
actually  have  been  ascertained  to  be  worthless.  Besides, 
an  account,  to  be  deductible,  must  be  actually  written 
off  in  the  period  for  which  it  is  deducted. 

Amounts  added  to  reserve  funds  of  insurance  compa- 
nies, as  required  by  law,  are  not  deductible  from  a  re- 
turn of  net  income. 

Reserves  set  aside  for  contingencies,  or  so  called  "  se- 
cret reserves  "  are  not  deductible  from  returns  of  annual 
net  income.  Charging  capital  expenditures  to  operating 
expenses  is  specifically  prohibited. 

Items  held  in  suspense,  pending  an  event,  are  not  de- 
ductible from  income  for  income  tax  purposes. 

Amounts  set  aside  out  of  profits,  or  reinvested,  for 
the  purpose  of  redeeming  outstanding  bonds  payable, 
are  not  deductible  from  taxable  income.  The  redemption 
of  bonds  is  a  capital  expenditure. 

Discounts  on  sales  of  commodities  dealt  in  are  only 
deductible  to  the  amount  actually  allowed  to  customers. 
A  reserve  for  cash  discounts,  the  establishment  of  which 
is  approved  by  modern  accounting,  being  anticipatory 
and  not  actual,  is  not  deductible  from  income. 

A  corporation  is  allowed  as  a  deduction  interest  paid 
within  the  year  on  such  an  amount  of  indebtedness  as 
does  not  exceed  the  sum  of: 

(a)  The  entire  amount  of  the  paid-up  capital  stock 

outstanding  at  the  close  of  the  year,  or  if 
no  capital  stock,  the  entire  amount  of  capital 
employed  in  the  business  at  the  close  of  the 
year,  and 

(b)  One-half    of    its    interest-bearing   indebtedness 

then  outstanding. 

This  subject  is  more  fully  dealt  with  on  page  93. 


64 


INCOME   TAX — LAW   AND   ACCOUNTING 


Interest  on 
Indebtedness 
Secured  by 
Collateral, 
etc. 


Interest  on 

Preferred 

Stock 


Interest  on 
Bonds  of 
Corporation 


Amortization 
of  Discount 
on  Bonds 


The  interest  paid  during  the  year  on  indebtedness 
wholly  secured  by  collateral,  the  subject  of  sale  in  the 
ordinary  business  of  a  corporation,  joint-stock  company 
or  association,  is  deductible  as  an  expense  of  doing  busi- 
ness. Collateral,  which  may  be  the  subject  of  sale  in  the 
ordinary  business  of  a  company,  refers  to  commodities 
in  which  the  company  deals.  Real  estate,  in  this  sense, 
could  only  be  the  subject  of  sale  in  the  case  of  a  corpo- 
ration engaged  in  the  buying  and  selling  of  real  estate. 
This  applies  to  both  tangible  and  intangible  property  se- 
cured by  collateral,  but  limits  the  amount  of  indebtedness 
on  which  the  interest  may  be  computed  to  the  actual 
value  of  such  property  collateral. 

In  the  case  of  Anderson  vs.  Forty-two  Broadway  Co. 
(209  Fed.  991  and  213  Fed.  777  reversed  by  U.  S.  Sup. 
Ct.  Oct.,  1915)  (T.  D.  2261),  it  was  held  under  the  Cor- 
poration Excise  Tax,  that  a  real  estate  company  owning 
and  operating  an  office  building,  under  mortgage,  could 
not  deduct  the  interest  paid  on  such  mortgage  as  a  gen- 
eral expense,  under  item  4  (a)  (Form  1031)  but  only 
in  item  6  (a),  which  made  it  subject  to  the  limitation  of 
law  as  to  deductibility  of  interest.  For  limitation  of 
deductible  interest  under  present  law  see  page  93. 

Interest  on  any  form  or  class  of  capital  stock  is  not 
deductible  from  an  income  tax  return.  The  fact  that 
preferred  stock  is  "  guaranteed "  or  cumulative  as  to 
interest,  does  not  make  it  deductible. 

Interest  paid  on  outstanding  bonds  of  a  corporation  is 
deductible  in  item  6  (a)  of  Form  1031  Revised.  Where 
bonds  are  held  by  trustees,  however,  for  the  benefit  of 
the  issuing  corporation,  interest  paid  thereon  is  not 
deductible. 

"  In  the  case  of  a  corporation  selling  its  own  bonds 
at  a  discount,  the  amount  of  the  discount  should  be  pro- 
rated over  the  life  of  the  bonds  and  the  proportionate 
part  of  such  discount  applicable  to  each  year  during  the 


DEDUCTIONS   ALLOWED   CORPORATIONS  65 

life  of  the  bonds,  constitutes  an  allowable  deduction  from 
the  gross  income  of  such  year.  The  deduction  from 
gross  income  in  the  case  of  twenty  year  bonds,  would  be 
one-twentieth  of  the  aggregate  amount  of  the  discount 
on  the  bonds  sold."  (T.  D.  2137.) 

Where,  however,  bonds  were  sold  at  a  discount  prior 
to  the  incidence  of  the  income  tax  law,  and  such  dis- 
count had  been  charged  off  on  the  books  of  the  corpora- 
tion, then  such  discount  or  any  part  thereof,  shall  not 
again  be  deducted  from  the  gross  income. 

Premium  In  cases  where  bonds  are  purchased  at  a  premium,  such 

Purchased      premium  may  be  prorated  over  the  remaining  life  of  the 

bonds,  so  that  only  the  redemption  value  thereof  appears 

upon  the  books  when  the  bonds  mature. 

Organization  The  organization  and  incorporation  expenses  of  a  new 
Expense  enterprise  are  usually  charged  to  a  separate  account  in 
the  ledger.  If  such  expenses  amount  to  a  considerable 
sum  it  is  not  unusual  to  prorate  the  same  over  a  period 
of  years,  according  to  the  judgment  of  the  board  of  di- 
rectors. There  appears  to  have  been  no  ruling  upon 
the  acceptability  of  this  method  to  the  Treasury  Depart- 
ment. Although  the  law  specifically  limits  deductions  to 
"  the  ordinary  and  necessary  expenses  paid  within  the 
year  in  the  maintenance  of  its  business  and  operations," 
it  may  reasonably  be  assumed,  by  analogy,  that  such  ex- 
penses may  be  apportioned  over  a  period  of  time.  The 
account  is,  properly,  a  prepaid  expense  (sometimes  called 
deferred  asset)  and  in  character,  is  quite  similar  to  pre- 
paid expenses  that  are  proratable  over  fiscal  periods. 

Local  Taxes  for  grading  of  property,  paving,  sewerage  and 

similar  local  improvements  are  capital  expenditures  and 
not  deductible  from  income. 

Taxes  Paid         Taxes  paid  by  a  corporation  as  tenant  of  rented  prop- 
by  Tenant  shoul(1  be  deducted  in  the  return  as  rent  paid. 


66  INCOME  TAX — LAW  AND  ACCOUNTING 

Bonuses,  Bonuses  in  the  nature  of  gratuities  for  which  no  serv- 

Gratuities,       .  i       j  i    j     ,  M  1      ,        ,  .  ,   . 

Gifts  lce  ls  rendered  are  not  deductible,  but  bonuses  paid  m 

the  nature  of  compensation  for  extra  services  rendered 
are  deductible.     See  page  100. 

Salaries  of          A  corporation  continuing  to  pay  the  salary  of  an  em- 
Guardsmen     ployee  doing  duty  as  a  National  Guardsman  in  the  serv- 
ice of  the  United  States  is  permitted  to  deduct  the  salary 
paid  to  such  employee  in  its  return  of  annual  net  income. 

Pensions  Amounts  paid  to  retired  employees  or  to  their  families, 

or  those  dependent  upon  them,  in  the  nature  of  pensions, 
are  deductible  from  gross  income  as  expenses. 

Income  Income  tax  paid  is  deductible  as  taxes  in  the  year  paid. 

Tax  Paid 

Salesmen's         It  has  been  held  that  salesmen's  expenses  in  the  nature 
Expenses        Q£  entertainment  of  customers,  incurred  for  business  pur- 
poses, are  deductible  items. 

Defalcation  Losses  sustained  by  reason  of  defalcation  or  embezzle- 
ment ment  are  deductible  items.  It  has  been  held,  however,  in 
the  case  of  United  States  vs.  The  Cleveland,  Cincinnati, 
Chicago  and  St.  Louis  Railway  Co.,  decided  February  23, 
1916,  in  the  U.  S.  District  Court,  Southern  District  of 
Ohio,  that  such  losses  shall  be  deductible  only  in  the  year 
that  the  defalcation  or  embezzlement  occurs.  Should 
such  loss  or  losses  not  be  discovered  until  a  subsequent 
year  they  would  not  then  be  deductible.  "  The  time  of 
discovery  of  a  loss  bears  no  relation  to  the  date  the  loss 
was  sustained.  The  loss  was  sustained  when  the  theft 
occurred,  although  the  defendant  did  not  know  at  the 
time  of  the  depletion  of  its  assets." 

Deductions         A  foreign  corporation  is  allowed  to  deduct:  All  ordi- 
Allowed  .  ,       ..,.      ., 

Foreign          narv  and  necessary   expenses   actually  paid   within  the 

Corporations  United  States;  losses  actually  sustained  within  the  year 
in  its  business  or  trade,  within  the  United  States,  not 
compensated  for  by  insurance,  or  otherwise ;  also,  reason- 


DEDUCTIONS   ALLOWED   CORPORATIONS  67 

able  allowance  for  depreciation  and  depletion  of  proper- 
ties within  the  United  States. 

The  deductions  allowed  to  foreign  corporations  as 
necessary  expenses,  actual  losses,  depreciation  and  de- 
pletion, are  the  same  as  those  allowed  to  a  domestic  cor- 
poration, except  that  only  such  expenses,  losses,  deprecia- 
tion, depletion,  etc.,  as  occur  in  connection  with  the  busi- 
ness of  such  foreign  corporation  within  the  United 
States  are  allowed. 

The  provisions  with  respect  to  permanent  improve- 
ments, betterments  and  expense  of  restoring  property, 
are  applicable  to  foreign  corporations. 

The  amount  on  which  interest  is  allowed  to  foreign 
corporations  shall  not  exceed  such  part  of  the  entire 
paid-up  capital  stock  outstanding  at  the  close  of  the  year, 
and  one-half  of  its  interest-bearing  indebtedness  then 
outstanding,  "  which  the  gross  amount  of  its  income  for 
the  year  from  business  transacted  and  capital  invested 
within  the  United  States  bears  to  the  gross  amount  of  its 
income  derived  from  all  sources  within  and  without  the 
United  States." 

Taxes  paid  by  a  foreign  corporation  within  the  United 
States  are  deductible,  not  including  those  assessed  against 
local  benefits. 


68 


CHAPTER   IV 
DEPRECIATION 

Depreciation       Depreciation  is  a  deductible  allowance  in  the  ascer- 

fromUCtiblC      tainment  of   net   income   for  tax   purposes.     It   should 

Income  represent,  as  nearly  as  possible,  the  actual  deterioration 

of  such  physical  properties  as  are  susceptible  of  wear 

and  tear  and  decrease  in  value  by  the  efflux  of  time. 

In  a  broad  sense  of  the  word  depreciation  means  a 
reduction  in  value  and  may  be  applied  to  all  kinds  of 
property.  As  used  in  the  income  tax  law,  however,  it  is 
applicable  only  to  tangible  property,  such  as  is  "  subject 
to  wear  and  tear,  exhaustion  and  obsolescence."  Hence, 
depreciation  will  be  allowed  as  a  deduction  from  revenue 
only  on  physical  properties,  such  as  buildings,  fixtures, 
machinery,  etc.  All  depreciation  to  be  deductible  must 
be  actually  charged  off  in  the  books  of  account  in  the 
period  for  which  it  is  claimed. 

Methods  of       There  are  several  methods  of  computing  rates  of  de- 
preciation,  the  most  common  of  which  are: 

1.  By  equal  instalments. 

2.  On  diminishing  values. 

The  first  method  is  ordinarily  used  where  the  prop- 
erty depreciated  has  no  residual  value,  and  the  second  one 
where  the  property  has  a  residual  value.  Charging  off 
equal  instalments  is  most  commonly  employed  with  re- 
spect to  all  properties,  whether  they  have  a  residual 
value  or  not,  and  only  that  method  has  as  yet  been  sug- 
gested or  approved  by  rulings  of  the  Treasury  Depart- 
ment or  court  decision  in  connection  with  deductions 
from  income  tax  returns. 

In  a  publication  issued  by  the  Federal  Trade  Com- 
mission recently,  on  the  subject  of  "  Fundamentals  of 
a  Cost  System  for  Manufacturers,"  both  methods  are 


DEPRECIATION  69 

approved  in  the  following  language :  "  There  are  sev- 
eral methods  of  determining  the  amount  of  deprecia- 
tion. One  is  to  estimate  the  scrap  value  and  deduct  this 
figure  from  the  original  cost.  The  difference  is  then 
divided  by  the  estimated  life  of  the  machine  in  years,  and 
the  result  is  the  annual  depreciation  on  that  machine. 
A  modification  of  this  method  which  is  not  quite  as  sim- 
ple, but  really  affords  no  difficulty,  is  after  ascertaining 
the  amount  to  be  charged  off  during  the  life  of  the  ma- 
chine, to  determine  a  percentage  which,  when  applied  to 
the  net  book  value  of  the  machine,  will  leave  only  the 
scrap  value  of  the  machine  on  the  books  at  the  expira- 
tion of  its  estimated  life. 

"  To  illustrate :  If  the  initial  cost  of  a  machine  and 
equipment  is  $1,000  and  the  estimated  scrap  value  is 
$200,  with  an  estimated  life  of  ten  years,  then  $800  is 
the  amount  that  must  be  charged  into  cost  during  that 
period,  or  $80  per  year.  To  attain  this  result,  by  using 
the  net  value  of  the  machine  as  a  basis,  a  rate  of  15 
per  cent,  would  be  necessary,  which  would  make  the 
depreciation  15  per  cent,  on  $1,000,  or  $150  the  first  year; 
15  per  cent,  on  $850,  or  $127.50  the  second  year,  etc. 
The  advantage  of  this  method  in  the  interest  of  normal 
costs  is,  that  the  decrease  in  depreciation  charges  is  ordi- 
narily offset  by  an  increase  in  repairs." 

Where  reserves  for  depreciation  are  used  in  conjunc- 
tion with  the  "  Diminishing  Value  Method  "  the  amount 
of  the  reserve  set  aside  in  past  periods  should  be  de- 
ducted from  the  asset  account  before  the  depreciation 
is  computed  thereon. 

Reserve  for  The  most  approved  method  of  double  entry  bookkeep- 
Depreciation  m^  favors  the  establishment  of  reserves  for  deprecia- 
tion instead  of  reducing  the  balances  of  the  asset  account 
in  the  ledger.  This  is  accomplished  by  journal  entry, 
made  either  monthly  or  at  the  end  of  the  fiscal  period, 
just  prior  to  closing  the  books  of  account,  as  follows: 


70  INCOME   TAX — LAW  AND   ACCOUNTING 

Depreciation   $250.00 

To   Reserve   for   Depreciation   of   Furniture   and 

Fixtures   $250.00 

Depreciation  at  10%  per  annum  on  Furniture  and 

Fixtures  for  the  year  1916.     (Book  value — cost 

-$2,500.) 

The  Depreciation  Account  is  closed  into  Profit  and 
Loss  Account  and  the  Reserve  for  Depreciation,  a  nega- 
tive account,1  remains  open.  In  the  Statement  of  Assets 
and  Liabilities  the  Reserve  for  Depreciation  is  deducted 
from  the  asset  account  and  extended  at  the  net  amount, 
as  follows: 

Furniture  and  Fixtures $2,500  00 

Less      Reserve      for     Depreciation 

(10%)    250.00 

$2,250.00 

Although  not  essential,  it  is  advisable  to  keep  a  separate 
reserve  account  for  each  class  of  assets,  as :  Reserve 
for  Depreciation  of  Furniture  and  Fixtures,  Reserve  for 
Depreciation  of  Machinery,  Reserve  for  Depreciation  of 
Buildings,  etc.  This  separation  renders  more  accessible 
the  amount  of  deduction  from  the  respective  asset  ac- 
counts, when  preparing  the  balance  sheet. 

A  Reserve  for  Depreciation  must  be  kept  separate  and 
distinct  from  other  reserve  accounts  and  reserve  funds. 
A  reserve  fund  is  an  amount  set  aside  for  the  purpose, 
among  others,  of  providing  an  available  asset  (cash  or 
readily  convertible  investment)  for  a  present  or  future 
obligation,  as  a  renewal  of  plant  and  machinery.  The 
creation  of  such  fund  does  not  incur  the  reduction  of 
surplus  or  profit  because  it  is  not  an  expense;  it  is  not 
created  by  a  reduction  of  revenue,  but  merely  a  conver- 
sion of  profits  or  surplus.  Hence,  a  reserve  fund  set 
aside  for  amortization  of  bonds,  or  to  provide  quick 

1 A  negative  account  is  one  that  is  neither  an  asset  nor  a  lia- 
bility; it  qualifies  an  asset  account,  as,  for  example,  Furniture 
and  Fixtures. 


DEPRECIATION  71 

assets  for  any  other  purpose,  is  not  a  competent  deduc- 
tion in  an  income  tax  return.  Nor  are  reserve  accounts 
properly  deductible  except  in  so  far  as  they  are  a  reduc- 
tion of  the  value  of  an  asset.  A  reserve  account  appear- 
ing on  the  liability  side  of  a  balance  sheet,  unless  rep- 
resented by  a  specially  invested  fund  in  the  assets,  is 
offset  by  all  the  assets  in  the  balance  sheet.  But  a 
"  Reserve  for  Depreciation "  is,  technically,  neither  a 
reserve  fund  nor  reserve  account,  because  it  has  been 
charged  against  revenue  and  has  reduced  the  surplus. 
To  be  a  true  reserve  it  should  not  reduce  the  revenue  or 
surplus.  Therefore,  a  "  Reserve  for  Depreciation  "  is 
nothing  more  than  an  "  allowance  for  depreciation  "  and 
should  never  be  stated  on  the  liability  side  of  a  balance 
sheet.  It  is  nothing  more  than  a  negative  account,  a  re- 
duction of  the  book  value  of  a  particular  asset,  and 
should  be  deducted  in  the  Statement  of  Assets  and  Lia- 
bilities from  the  asset  to  which  it  refers. 

Hence,  under  rulings  in  connection  with  the  income 
tax,  a  so-called  "  Reserve  for  Depreciation  "  shall  not  be 
diverted  to  any  purpose  except  "  making  good  the  loss 
sustained  by  reason  of  wear  and  tear,  exhaustion  or  ob- 
solescence of  the  property  with  respect  to  which  it  was 
claimed." 

Depreciation  may  only  be  charged  off  up  to  the  cost  of 
the  property  depreciated.  Should  depreciation,  for  any 
reason,  have  been  charged  off  in  excess  of  such  amount, 
then  such  excess  shall  be  reported  as  income  (Art.  132, 
Reg.  33). 

Rates  of  The  law  does  not  prescribe  rates  of  depreciation  be- 

Depreciation  cause  these  depend  upon  the  kind  and  class  of  property, 
and  upon  the  conditions  under  which  the  property  is 
used.  Fixing  rates  of  depreciation  is  more  or  less  ar- 
bitrary at  best. 

The  fairness  of  rates  of  depreciation,  deducted  in  re- 
turns of  net  income,  are  questions  of  fact,  and  not  of 
law;  that  is  to  say,  such  questions  at  issue  in  a  court 


72  INCOME   TAX — LAW  AND   ACCOUNTING 

of  law   would,   ordinarily,  be   submitted  to  a  jury   for 
determination. 

Technical  rate  fixing  is  a  question  on  which  there  are 
diversified  opinions,  even  amongst  the  best  engineers. 
But  engineers  have  suggested  rates  for  various  classes 
of  properties  that  work  out  fairly  accurately  for  all 
practical  purposes.  The  rates  mentioned  herein  are  sug- 
gestive only.  They  are  based  upon  the  experience  of 
engineers  and  accountants. 

Buildings  In  the  case  of  Hyman  Cohen  vs.  John  Z.  Lowe,  Jr., 

Collector  (decided  July  18,  1916),  tried  before  a  jury 
in  the  United  States  District  Court  for  the  Southern 
District  of  New  York,  Judge  Grubb  stated  that,  in  his 
opinion,  depreciation  on  a  building  should  be  based  upon 
the  number  of  years  "  the  building  would  remain  in  a 
condition  to  be  habitable  for  the  uses  for  which  it  was 
constructed  and  used  *  *  *.  The  annual  deprecia- 
tion would  be  an  amount  represented  by  a  fraction  hav- 
ing one  (the  tax  year)  for  the  numerator  and  the  number 
of  years,  representing  the  ascertained  life  of  the  build- 
ing, as  the  denominator."  Hence,  a  building,  estimated 
to  remain  habitable  and  fit  for  the  purposes  for  which 
it  was  erected  for  a  term  of  forty  years,  would  suffer 
an  annual  depreciation  of  2y2  per  cent.  In  the  Cohen 
case,  just  cited,  the  plaintiff  (owner  of  building)  claimed 
a  depreciation  of  5  per  cent,  for  the  tax  year  (1913). 
The  Collector  of  Internal  Revenue  allowed  only  3  per 
cent.,  and  the  plaintiff  brought  an  action  to  enforce  his 
claim  of  5  per  cent.  The  jury  brought  in  a  verdict  that 
they  considered  3  per  cent,  an  adequate  allowance.  The 
building  in  question  was  a  New  York'  apartment  house. 
Depreciation  is  allowed  only  on  the  cost  of  buildings 
and  improvements,  not  on  the  land.  For  depreciation 
and  other  purposes,  buildings  and  land  should  be  carried 
in  separate  accounts  in  the  ledger.  If  the  separate  cost 
of  buildings,  as  apart  from  the  land,  is  not  ascertainable, 
then  the  separate  value  of  improvements,  as  shown  by 


DEPRECIATION 


73 


Building 
Repairs 


Additions 
Betterments 


Additions 
to  Leased 
Property 


the  real  estate  tax  assessments,  may  be  used,  or,  the  value 
of  buildings  and  improvements  may  be  estimated  as  at 
March  1,  1913,  if  then  in  existence,  "  provided  that  the 
value  placed  upon  such  buildings  shall  not  be  in  excess 
of  the  cost  of  such  buildings,  less  an  amount  measuring 
the  depreciation  which  had  previously  been  sustained." 

To  measure  the  fairness  of  the  amount  on  which  de- 
preciation has  been  deducted  on  buildings,  in  returns  of 
net  income,  Internal  Revenue  Inspectors  have  made  com- 
parison with  the  amount  of  fire  insurance  carried  thereon. 
But  that,  for  obvious  reasons,  is  not  a  fair  comparison. 

The  question  of  rate  of  depreciation  must  always  be 
determined  upon  the  conditions  governing  each  particular 
case.  The  rate  on  brick  buildings  varies  from  \l/2  to  5 
per  cent,  per  annum,  according  to  construction  and  use  to 
which  buildings  are  put.  A  factory  building,  wherein 
manufacturing  of  heavy  machinery  is  carried  on,  may 
suffer  a  larger  depreciation  than  5  per  cent,  per  annum. 

It  is  reasonable  to  assume  that  frame  buildings  are 
subject  to  a  larger  rate  of  depreciation  than  brick  or  con- 
crete buildings,  because  of  having  a  shorter  period  of 
usefulness.  The  rates  on  frame  buildings  will  vary  from 
2l/2  to  7l/2  per  cent.,  according  to  construction  and  uses, 
and  may  run  higher  in  some  cases. 

In  estimating  the  life  of  a  building  for  the  purpose  of 
determining  upon  a  rate  of  depreciation,  it  must  be  as- 
sumed that  the  property  is  maintained  in  proper  repair. 
The  cost  of  repairs  and  expenses  of  upkeep  are  deductible 
items  in  a  return  of  net  income. 

Additions  to  buildings  or  any  expenditure  that  consti- 
tutes an  increase  in  the  investment  therein,  such  as  per- 
manent improvements  and  betterments,  are  not  de- 
ductible. 

A  person  or  corporation  holding  premises  as  lessee, 
for  a  term  of  years,  requiring  the  tenant  by  terms  of  the 
lease  to  make  all  repairs  and  improvements,  if  any,  has 


74 


INCOME   TAX — LAW  AND   ACCOUNTING 


Buildings 
Erected 
by  Tenants 


Furniture 

and 

Fixtures 


Dwellings 


the  right  to  deduct  the  improvements  as  well  as  repairs 
from  his  or  its  gross  income.  Such  improvements  should 
be  prorated  over  the  period  of  the  lease.  The  repairs, 
however,  may  be  deducted  as  current  expenses. 

The  cost  of  buildings  erected  by  tenants  on  leased 
ground,  which,  upon  expiration  of  the  lease,  revert  to 
the  landlord,  may  be  prorated  over  the  period  of  the 
lease  and  deducted  as  an  expense  of  doing  business.  The 
amount  charged  off  (prorated)  should  be  deducted  in 
the  return  of  net  income  of  a  corporation  as  rent  paid. 

Ordinarily  business  concerns  capitalize  amounts  paid 
for  furniture,  fixtures  and  office  equipment;  that  is  to 
say,  they  establish  a  Furniture  and  Fixture  Account  in 
the  ledger  and  charge  purchases  of  that  class  of  assets 
to  such  account.  This  class  of  property  depreciates  from 
5  to  25  per  cent,  per  annum ;  10  per  cent,  is  the  usual 
charge  where  renewals  are  added  to  the  account. 

An  uncommon  practice  is  to  charge  off  the  entire  cost 
of  renewals  of  furniture  and  office  equipment  as  a  cost 
of  doing  business.  This  method,  in  the  case  of  Mutual 
Benefit  Life  Insurance  Company  vs.  Herold  (198  Fed., 
199)  was  approved.  It  was  there  held  that  "  Renewals 
of  office  furniture  and  equipment "  were  "  expense  of 
maintenance "  deductible  in  the  ascertainment  of  net 
income.  As  this  decision  deals  only  with  "  renewals  " 
of  such  equipment  it  would  not  apply  to  the  first  cost. 

Furniture,  fixtures  and  office  equipment  should  be  car- 
ried in  a  separate  ledger  account  from  office  supplies. 
Office  equipment  represents  a  fixed  asset,  whereas  office 
supplies  is  an  expense  account. 

Depreciation  on  a  dwelling  (residence)  occupied  by 
the  owner  himself  is  not  deductible;  on  dwellings  that 
are  held  for  investment,  however,  by  both  individuals 
and  corporations,  a  reasonable  charge  for  depreciation  is 
allowed. 

"  Reasonable   allowance    for   the   wear   and   tear   of 


DEPRECIATION 


75 


Farm 
Buildings 


Depletion 
of  Mines 


Depletion, 
Oil  and  Gas 
Wells 


Timber 
Lands 


Machinery 


property  arising  from  its  use  for  rental  purposes  may  be 
claimed  as  a  deduction,  but  no  claim  for  depreciation 
should  be  made  on  account  of  any  amount  of  expense 
of  restoring  property  or  making  good  the  exhaustion 
thereof  for  which  a  deduction  is  claimed  elsewhere  in  the 
return."  (Letter  by  Commissioner  of  Internal  Revenue 
to  the  Corporation  Trust  Co.,  Feb.  26,  1916.) 

Depreciation  on  farm  buildings,  other  than  those  oc- 
cupied by  the  owner  himself,  may  be  deducted  from 
income.  (T.  D.  2090.) 

A  reasonable  allowance  for  depletion  of  mines,  not  to 
exceed  the  market  value  in  the  mine  of  the  product 
thereof  which  has  been  mined  and  sold  during  the  year 
for  which  the  return  and  computation  are  made,  will  be 
allowed.  When  the  allowance  authorized  shall  equal  the 
capital  originally  invested  or  in  case  of  purchase  made 
prior  to  March  1,  1913,  the  fair  market  value  as  of  that 
date,  no  further  allowance  for  depletion  shall  be  made. 

In  the  case  of  oil  and  gas  wells  a  reasonable  allowance 
for  actual  reduction  in  flow  and  production  to  be  ascer- 
tained not  by  the  flush  flow,  but  by  the  settled  production 
or  regular  flow.  As  in  the  case  of  mines,  when  the  allow- 
ance authorized  for  depletion  shall  equal  the  capital 
originally  invested,  or  in  case  of  purchase  made  prior 
to  March  1,  1913,  the  fair  market  value  as  of  that  date, 
then  no  further  allowance  shall  be  made. 

The  rate  of  depreciation  on  timber  lands  should  be 
such  as  to  return  to  the  owner,  when  the  timber  has  been 
exhausted,  the  capital  originally  invested  therein,  except 
if  the  property  was  acquired  prior  to  March  1,  1913, 
the  fair  market  value  as  of  that  date. 

There  are  so  many  different  classes  and  kinds  of  ma- 
chinery that  it  would  be  well  nigh  impossible  to  fix  a  rate 
of  depreciation  that  would  uniformly  apply  to  all  classes. 
L.  R.  Dicksee,  an  English  accountant  of  recognized 


76  INCOME   TAX — LAW  AND   ACCOUNTING 

ability,  in  his  work  on  "  Depreciation,  Reserves  and  Re- 
serve Funds,"  has  suggested  annual  rates  of  depreciation 
on  machinery,  based  on  diminishing  values,  as  follows : 

General  machinery  7y2  to  10  per  cent. 

Special  machinery    10       to  25  per  cent. 

To  facilitate  the  computing  of  depreciation  on  a  variety 
of  classes  of  machinery,  it  is  advantageous  to  classify 
them  according  to  expected  life,  and  then  to  compute 
the  depreciation  on  each  class  accordingly. 

The  scrap  or  residual  value  of  machinery  should  be 
taken  into  consideration  in  arriving  at  rates  of  deprecia- 
tion. 

There  is  a  diversity  of  opinion  as  to  the  rate  of  depre- 
ciation to  which  engines  and  boilers  are  subject.  Dicksee 
suggests  annual  rates,  on  a  diminishing  value,  as  follows : 

Engines  (in  general)   10      to  \2y2  per  cent. 

Boilers \2l/2  to  20      per  cent. 

George  M.  Craven,  whose  tables  of  depreciation  have 
been  adopted  by  commissions  passing  upon  rate  cases, 
and  who  errs  on  the  conservative  rather  than  the  liberal 
side,  based  on  cost  (not  diminishing  value)  per  annum, 
suggests  the  following  rates : 

Steam  engines  3       to     6.6  per  cent. 

Boilers 3.5  to  10       per  cent. 

Composite  opinions,  however,  are  that  engines  and 
boilers,  if  maintained  in  a  proper  state  of  repair,  which 
necessarily  must  be  assumed,  should  last,  in  the  absence 
of  unfavorable  conditions,  about  ten  years,  and  would 
be  subject  to  an  average  depreciation  of  10  per  cent,  per 
annum.  If  unfavorable  conditions  prevail,  they  would 
naturally  be  replaced  oftener  and  the  rate  of  deprecia- 
tion would  be  proportionately  higher. 

Article  131  of  Treasury  Department  Regulations  No. 
33  states  that  "  Incidental  repairs  which  neither  add  to 
the  value  of  the  property  nor  appreciably  prolong  its 


DEPRECIATION  77 

life,  but  keep  it  in  an  operating  condition,  may  be  de- 
ducted as  expenses."  Notwithstanding  the  apparent 
clearness  of  this  regulation,  there  have  been  many  con- 
troversies between  Collectors  of  Internal  Revenue  and 
taxpayers  as  to  what  constitutes  "  incidental  repairs." 
Rulings  on  the  subject  have  recommended  the  establish- 
ment of  reserves  for  depreciation  and  directed  that  to 
such  reserve  accounts  should  be  charged  "  the  cost  of  re- 
newing or  replacing  the  property  with  respect  to  which 
the  depreciation  is  claimed."  But  it  is  not  intended  that 
"  incidental  repairs  "  that  merely  "  keep  it  in  operating 
condition  "  shall  be  so  charged,  because,  under  the  above 
regulation,  such  expenses  are  separately  deductible  from 
income. 

The  main  object  and  purpose  of  charging  off  depre- 
ciation is  not  to  provide  a  fund  out  of  which  to  make 
repairs,  but  in  the  case  of  a  machine,  for  example,  to 
provide  for  the  replacement  of  such  machine  when  it  has 
served  its  usefulness. 

The  income  tax  law  contemplates  more  than  a  mere 
renewal  and  repair  reserve  because  it  specifically  permits 
the  deduction  of  "All  the  ordinary  and  necessary  ex- 
penses paid  within  the  year  in  the  maintenance  and 
operation  of  its  business  and  properties  *  *  *,"  as 
well  as  "  a  reasonable  allowance  for  the  exhaustion,  wear 
and  tear  of  property  arising  out  of  its  employment  in 
the  business  or  trade."  These  are  separate  and  distinct 
provisions,  first  for  necessary  expenses,  which  must  in- 
clude repairs,  and,  second,  for  depreciation. 

It  may  be  true  in  respect  to  a  machine,  or  any  other 
property,  which  is  periodically  wholly  rebuilt,  that  the 
depreciation  is  very  small,  but  that  it  suffers  some  de- 
gree of  depreciation  is  axiomatic.  Whether,  however, 
the  cost  of  such  renewals  should  be  charged  to  the  re- 
serve for  depreciation  or  to  an  expense*account,  should 
depend  upon  the  adequacy  of  the  rate  of  depreciation 
charged  off.  Hence,  in  fixing  upon  rates  of  depreciation 


78 


INCOME   TAX — LAW  AND   ACCOUNTING 


Shafting 


Tools 


Miscella- 
neous 
Equipment 


it  should  be  predetermined  whether  renewals  will  be 
charged  against  the  reserve  for  depreciation  or  to  an 
expense  account.  Regardless  of  which  method  is 
adopted  the  accumulation  of  depreciation  reserved  should 
be  such  an  amount  as  will  return  to  the  corporation  or 
individual  the  cost  of  the  property  upon  the  termination 
of  its  usefulness. 

Shafting,  based  upon  a  diminishing  value,  has  beefi 
estimated  to  suffer  depreciation  at  the  rate  of  5  to  7^ 
per  cent,  per  annum. 

Small  tools  should  be  charged  to  a  separate  account 
in  the  ledger.  Physical  inventories  should  be  taken  pe- 
riodically and  the  account  written  down  to  the  amount 
of  such  inventory.  The  difference  between  the  book 
value  and  the  physical  inventory  value  should  be  charged 
to  depreciation,  and  in  the  course  of  time  it  should  be  pos- 
sible to  determine  upon  an  average  rate  of  depreciation 
that  will  answer  all  practical  purposes.  Such  average 
rate  should,  however,  from  time  to  time,  be  verified  by 
physical  inventories.  This  principle  may  be  applied  to 
all  items  that  are  being  constantly  used  up  and  replaced. 

In  as  much  as  the  rates  of  depreciation  suggested  by 
Craven  have  been  adopted  by  various  industrial  concerns 
and  commissions,  they  are  worthy  of  consideration.  They 
are,  however,  by  many,  considered  too  low  and  are  stated 
here  only  as  suggestive  of  the  most  conservative  annual 
rates : 

Shop  Equipment 3  to  15       per  cent. 

Motors    4  to  10      per  cent. 

Storage  Batteries    5  to  1 1       per  cent. 

Belted  Generators 3.3  to  10      per  cent. 

Switchboards,  etc 2  to  10      per  cent. 

Wires  and  Cables 2  to     6.6  per  cent. 

Steam  Piping   3.5  to  10      per  cent. 

per  cent. 


Steam  Turbines 
Auxiliaries   . 


5  to    9 

5  to  10  per  cent 


DEPRECIATION 


79 


The  equipment  of  laundries  is,  ordinarily,  subject  to 
an  annual  depreciation  of  from  7j^  to  15  per  cent,  of 
the  cost. 

Patterns  are  made  of  so  large  a  variety  of  materials 
and  used  so  differently,  that  each  case  will  have  to  be 
decided  according  to  the  particular  requirements.  Pat- 
terns that  are  continuously  used  and  must  be  replaced 
often  may  properly  be  charged  off  at  once  as  a  cost  of 
production.  Special  patterns  should  always  be  charged 
direct  to  the  job  for  which  they  were  made. 

Dicksee  suggests  annual  rates,  based  on  diminishing 
values,  of  25  to  33  1/3  per  cent. 

But  there  can  be  no  obligation  on  the  part  of  the 
manufacturer  to  capitalize  any  expenditure  unless  it  is 
unquestionably  a  capital  expense. 

Accountancy  maintains  (some  accountants  to  the  con- 
trary notwithstanding)  that  where  there  is  a  reasonable 
doubt  as  to  whether  an  expenditure  is  a  capital  or  ex- 
pense item,  it  should  be  charged  against  revenue.  That 
precludes  questionable  items  entering  a  balance  sheet, 
and  indicates  a  business  policy  with  which  no  law  should 
be  at  variance. 

Patents  are  issued  in  the  United  States  for  a  period 
of  seventeen  years.  It  is  customary  for  manufacturing 
corporations,  operating  under  patent  rights,  to  capitalize 
all  direct  expenses  in  connection  with  obtaining  patents 
either  by  their  own  application  to  the  Patent  Office  or 
by  purchase. 

In  case  the  corporation  itself  procures  the  patent,  it 
has  the  right  to  deduct  depreciation  annually  at  the  rate 
of  1/17  of  the  total  cost,  including  experimental  work, 
cost  of  models  and  drawings,  fees  of  the  Patent  Office, 
legal  expenses,  and  all  direct  charges  in  connection  there- 
with. 

If  the  patent  is  purchased  by  the  corporation,  then 
the  depreciation  would  be  based  on  the  cost  thereof  and 


80 


INCOME   TAX — LAW  AND   ACCOUNTING 


Copyrights 


Auto 
Trucks 


the  rate  would  be  fixed  according  to  the  length  of  time 
that  the  patent  had  still  to  run;  for  instance,  a  patent 
purchased  for  $10,000,  that  had  been  issued  seven  years 
prior  to  its  purchase,  having  a  remaining  life  of  ten 
years,  would  be  subject  to  an  annual  depreciation  of  10 
per  cent,  of  the  cost,  amounting  to  $1,000.  This  amount 
would  be  a  competent  annual  charge  against  gross  in- 
come. 

The  principles  stated  with  respect  to  patents  are  true 
also  as  to  copyrights,  except  that  copyrights  are  issued 
for  the  period  of  twenty-eight  years.  A  more  conserva- 
tive method,  in  the  case  of  copyrights,  however,  is  to 
estimate  the  period  of  salability  of  the  subject  of  copy- 
right and  prorate  the  amount  to  be  charged  off  accord- 
ingly. 

Automobile  trucks  deteriorate  according  to  the  sever- 
ity of  the  use  to  which  they  are  subjected.  The  life 
of  a  motor,  used  for  trucking  purposes,  receiving  rea- 
sonable care  and  properly  maintained,  may  be  estimated 
to  be  from  three  to  six  years.  As  with  other  property, 
the  rate  of  depreciation  is  fixed  according  to  its  life.  The 
life  of  an  auto  truck  is  such  a  length  of  time  as  it  re- 
mains fit  for  the  purpose  for  which  it  was  acquired. 

The  annual  rate  applicable  to  auto  trucks  will  vary 
from  15  to  50  per  cent.  Based  on  a  replacement  value, 
the  heaviest  depreciation  occurs  during  the  first  year, 
and  it  is  not  uncommon  to  write  off  as  much  as  50  per 
cent,  of  the  cost  during  that  time.  Thereafter  the  rate 
would  not  exceed  25  per  cent,  per  annum. 

The  most  accurate  and  conservative  method  is  to 
appraise  motor  trucks  at  the  end  of  each  year  and  to 
write  off  the  shrinkage  in  value  during  the  year  for 
which  the  return  of  net  income  is  computed.  This 
method,  being  based  on  actual  facts,  cannot  be  objection- 
able for  income  tax  purposes. 

All  costs  of  repairs,  replacements  or  parts,  tires,  over- 


DEPRECIATION 


81 


hauling,  painting,  supplies,  gas,  oil,  licenses  and  insur- 
ance, in  connection  with  auto  trucks  are  deductible  ex- 
penses in  the  return  of  net  income. 

Depreciation  on  horses  varies  so  widely  that  each  con- 
cern should  work  out  its  own  table  of  experience  for 
depreciation  purposes.  Rather  than  to  guess  at  an  arbi- 
trary rate  of  depreciation,  it  is  advisable  to  revalue 
horses  at  the  end  of  each  fiscal  period.  The  loss  in  value 
during  the  tax  year  may  then  be  deducted  as  deprecia- 
tion, and,  in  the  course  of  time,  it  will  be  possible  to 
formulate,  fairly  accurately,  the  rate  of  depreciation  to 
which  horses,  in  the  particular  business,  are  subject.  It 
may  be  said  that,  ordinarily,  the  rate  of  depreciation  on 
horses  will  vary  from  15  to  25  per  cent,  of  their  cost. 

Stable  equipment  usually  suffers  a  depreciation  of 
from  7^4  to  15  per  cent,  per  annum. 

Depreciation  on  good  will  is  not  allowed,  because  it  is 
an  intangible  asset  that  cannot  suffer  loss  by  reason  of 
"  wear  and  tear  "  or  "  obsolescence."  From  an  account- 
ing point  of  view,  the  practice  of  "  writing  down  "  the 
book  value  of  good  will  is  not  an  unusual  one  in  periods 
of  prosperity.  Its  purpose  is,  primarily,  to  reduce  the 
book  assets  to  tangible  properties  and  thereby  give  the 
balance  sheet  a  healthier  appearance.  The  practice, 
although  commendable,  and  perhaps  a  sign  of  conserva- 
tive management,  does  not  permit  of  a  deduction  in  the 
income  tax  return.  As  a  matter  of  bookkeeping,  such  a 
charge  would  be  a  reduction  of  Surplus  Account  and 
not  of  Profit  and  Loss  Account  for  any  particular  period 
of  time. 

No  rule  for  charging  off  good  will  can  be  laid  down, 
because  in  a  flourishing  business,  the  good  will  is  of  pro- 
portionate value  and  should  not,  in  theory,  be  reduced; 
whereas,  in  periods  when  no  profits  are  being  earned,  the 
value  of  good  will  diminishes,  but  then  there  is  no 
profit  out  of  which  to  reduce  the  Good  Will  Account. 


82  INCOME   TAX — LAW  AND   ACCOUNTING 

Hence,  at  best,  the  reduction  of  good  will  is  a  purely 
arbitrary  matter  that  bears  no  relation  to  an  income  tax 
return. 

Investments  Stocks  and  bonds  fluctuate  in  value.  A  downward 
Stocks  and  fluctuation,  if  permanent,  may  be  said  to  be  deprecia- 
Bonds  tjon>  but  5^  is  not  deductible  for  income  tax  pur- 

poses. Losses  to  become  deductible  must  be  actually 
sustained  by  completed  and  closed  transactions.  A  mere 
reduction  in  book  value  by  direction  of  a  board  of  direc- 
tors, or  even  an  order  by  the  State  or  Federal  Banking 
Department,  to  reduce  or  write  off  securities,  does  not 
establish  a  loss  that  constitutes  a  deduction  from  taxable 
income.  "  Losses  of  this  character  are  only  ascertainable 
when  the  securities  mature,  are  disposed  of,  or  canceled." 
(T.  D.,  2152.) 

No  arbitrary  reduction  of  capital  assets  on  the  books 
of  a  corporation  or  individual  shall  justify  a  deduction 
from  income  for  tax  purposes.  Conversely,  the  appre- 
ciating, or  "  writing  up,"  of  capital  assets  to  conform, 
for  instance,  with  appraisal  values,  does  not  make  such 
increase  taxable  as  income.  (Baldwin  Locomotive 
Works  vs.  McCoach,  221  Fed.,  59.)  There  must  be  an 
actual  realization  of  the  enhanced  value  by  a  sale  for  cash, 
or  its  equivalent,  in  order  to  make  the  increase  taxable 
as  income. 

Theatrical  Theatrical  costumes  may  be  depreciated.      The  rate 

should  be  based  on  the  life  of  garment  or  time  allowed 
for  production  of  play,  whichever  is  the  shorter.  Obso- 
lescence is  an  important  element  for  consideration  in  de- 
termining the  life  of  a  costume.  Wearing  apparel,  serv- 
ing both  the  purpose  of  personal  and  theatrical  use,  may 
not  be  depreciated  for  the  purpose  of  income  tax. 

Trademarks  Neither  trademarks  nor  brands,  acquired  by  purchase 
Brands  or  otherwise,  are  subject  to  depreciation,  and  no  allow- 

ance for  income  tax  purposes  will  be  made  thereon. 


DEPRECIATION  83 

In  the  case  of  resale  of  trademarks  or  brands,  a  loss 
actually  sustained  would  be  deductible,  as  a  capital  loss. 
A  profit,  on  the  other  hand,  would  be  returnable  as  in- 
come. 

If  the  trademark  or  brand  was  acquired  prior  to  March 
1,  1913,  then  the  profit  or  loss  in  the  sale  thereof  would 
be  computed  on  the  basis  of  the  fair  market  value  as 
of  that  date  and  not  on  the  basis  of  cost.  This  applies 
to  the  sale  of  all  capital  assets  acquired  prior  to  the 
incidence  of  the  income  tax  law,  March  1,  1913! 

The  cost  of  registering  trademarks  and  brands,  being 
nominal,  should  be  included  in  the  expense  of  doing 
business.  Should  such  an  item  be  capitalized  it  would 
not  be  deductible  as  an  expense  in  a  subsequent  year. 

By  rulings  of  the  Treasury  Department  no  allowance 
for  depreciation  is  permitted  on  inventories  of  stock  on 
hand.  It  has  been  held  "  that  depreciation  will  not  be 
allowed  in  the  return  or  inventory,  on  merchandise,  as 
the  same  will  be  reflected  in  the  income  in  the  year  of 
its  disposal."  Also,  as  directed  in  the  supplementary 
statement  of  the  return,  "  In  case  the  annual  gain  or 
loss  is  determined  by  inventory,  merchandise  must  be 
inventoried  at  the  cost  price  *  *  *."  This  is  based 
upon  the  theory  that  no  actual  loss  is  sustained  until  the 
goods  are  sold. 

These  rulings  are  contrary  to  the  well  settled  prin- 
ciples of  accounting,  that  when  the  market  value  of  mer- 
chandise is  less  than  the  cost,  the  market  value  should 
prevail  for  inventory  purposes. 

A  merchant  who  commits  an  error  of  judgment  in 
buying  merchandise  should  be  permitted  to  apportion 
his  loss  over  the  periods  during  which  he  is  obliged  to 
carry  the  unsalable  goods  in  stock.  In  some  lines  of 
business  the  ruling  will  work  a  hardship.  Publishers, 
for  example,  who  must  carry  slow  selling  stock  from 
year  to  year,  a  large  part  of  which  eventually  proves  un- 
salable, will  be  piling  up  inflated  and  exaggerated  in- 


84  INCOME   TAX — LAW  AND  ACCOUNTING 

ventories  of  stock  on  hand,  if  computed  at  cost.  No  law 
should  encourage  the  overstatement  of  values  of  assets 
because  such  overstatement  affects  the  rights  of  credi- 
tors who  rely  on  the  representations  of  financial  state- 
ments as  a  credit  basis.  Besides,  under  State  laws,  the 
overstatement  of  assets  is  punishable  as  a  misrepresenta- 
tion of  facts.  Nor  is  the  ruling  that  inventories  must  be 
computed  at  cost  consistent  with  conservative  business 
methods. 

It  is  noteworthy  that  the  Federal  Trade  Commission 
in  a  pamphlet  issued  on  July  15th,  1916,  entitled  "  A  Sys- 
tem of  Accounts  for  Retail  Merchants  "  for  the  purpose 
of  "  Aiding  retail  merchants  to  improve  their  accounting 
methods  "  on  the  subject  of  depreciation,  states :  "  No 
merchant  can  be  said  to  be  managing  his  business  prop- 
erly unless  adequate  provision  is  made  for  depreciation." 
As  to  depreciation  on  merchandise,  under  the  title  of 
"  Profit  and  Loss  Account  "  it  says :  "  A  physical  inven- 
tory should  be  taken  at  least  once  a  year.  The  basis 
should  be  cost  with  conservative  deduction  for  obsolete 
and  shelf-worn  goods."  A  perusal  of  the  proforma  Pro- 
fit and  Loss  Account,  contained  on  page  18  of  the  pamph- 
let, discloses  a  deduction  from  inventory  designated 
"  Less  Stock  Depreciation  "  of  an  amount  equal  to  5  per 
cent,  of  the  inventory  which  concededly  was  based  on 
cost. 

The  only  danger  that  the  depreciation  of  inventories 
would  involve  in  connection  with  income  tax  returns,  is 
the  possible  manipulation  of  merchandise  values.  As  in 
the  case  of  depreciation  of  capital  assets,  fixed  rates  could 
not  be  prescribed  to  cover  all  cases,  but  manipulation  of 
inventories  for  the  purpose  of  showing  a  smaller  gross 
income  than  was  actually  earned  could  be  prevented  by 
requiring  detailed  information  as  to  how  the  inventory 
was  computed,  rate  of  depreciation  deducted,  etc. 

Until  there  has  been  a  court  adjudication  upon  the 
prescribed  ruling  of  computing  inventories,  stock  on  hand 


DEPRECIATION  85 

should  be  valued  at  cost.  In  cases  where  the  inventory, 
taken  at  cost,  results  in  an  inflated  or  overstated  "  net  in- 
come," it  is  recommended  that  the  individual  or  company 
aggrieved  place  all  the  facts  of  his  or  its  case  in  writing 
before  the  Commissioner  of  Internal  Revenue,  Washing- 
ton, D.  C,  or  the  collector  of  his  or  its  district,  and  ask 
for  a  special  ruling  thereon. 


86 


CHAPTER   V 
BOOKKEEPING    SUGGESTIONS 

PREPARATION  OF  INCOME  TAX  RETURNS  OF  CORPORA- 
TIONS 

Methods  of         The  amended  law  contains  a  provision  in  regard  to  the 
Bookkeeping  keeping  of  accounts,  as  follows : 

"A  corporation,  joint  stock  company  or  association, 
or  insurance  company,  keeping  account (s)  upon  any  basis 
other  than  that  of  actual  receipts  and  disbursements,  un- 
less such  other  basis  does  not  clearly  reflect  its  income, 
may,  subject  to  regulations  made  by  the  Commissioner  of 
Internal  Revenue,  with  the  approval  of  the  Secretary  of 
the  Treasury,  make  its  return  upon  the  basis  upon  which 
its  accounts  are  kept,  in  which  case  the  tax  shall  be  com- 
puted upon  its  income  as  so  returned." 

The  same  provision  is  made  with  respect  to  the  ac- 
counts of  individuals. 

This  permits  the  individual  or  corporation,  that  em- 
ploys a  method  of  bookkeeping  from  which  a  return 
cannot  be  prepared  in  the  prescribed  form,  to  render  the 
report  according  to  the  method  of  bookkeeping  employed, 
provided  only  that  the  books  from  which  the  return  is 
made  reflect  the  correct  income.  The  return,  however, 
must,  in  every  case,  be  made  on  the  blank  provided  by 
the  Government,  with  full  and  complete  explanations  as 
to  the  method  employed. 

The  dominant  and  foremost  requisite  in  the  prepara- 
tion of  income  tax  returns  is  TO  REPORT  THE 
FACTS.  The  method  employed  to  arrive  at  the  facts 
is  of  considerable  importance,  but  secondary.  A  vari- 
ance from  the  prescribed  classification  of  income  and 
expenses  may  be  unavoidable;  a  deliberate  disregard  of 
the  facts,  by  either  omission  or  declaration,  is  tantamount 
to  misrepresentation. 


BOOKKEEPING   SUGGESTIONS 


87 


The  income  and  expenses  should  be  classified  as  pre- 
scribed by  the  return  unless  the  nature  of  the  business  is 
such  that  it  does  not  permit  of  such  classification  or  un- 
less the  books  of  account  are  kept  in  conformity  with 
regulations  of  some  department  of  the  Government  re- 
quiring the  keeping  of  books  according  to  "  uniform 
systems  of  accounting,"  as  in  the  case  of  corporations 
coming  under  the  Interstate  Commerce  Commission. 

The  books  must  be  so  kept  that  each  and  every  item 
set  forth  in  the  return  of  annual  net  income  may  be 
readily  verified  by  an  examination  of  the  books  of 
account. 

Books  of  "  The  books  of  a  corporation  are  assumed  to  reflect 

Account  Best  the  facts  as  to,  its  earnings,  income,  etc.  Hence  they 
Income  will  be  taken  as  the  best  guide  in  determining  the  net  in- 
come upon  which  the  tax  imposed  by  this  act  is  calcu- 
lated. Except  as  the  same  may  be  modified  by  the  pro- 
visions of  the  law,  wherein  certain  deductions  are  limited, 
the  net  income  disclosed  by  the  books  and  verified  by  the 
annual  balance  sheet,  or  the  annual  report  to  stockhold- 
ers, should  be  the  same  as  that  returned  for  taxation." 
(Regulations  33,  Article  183.) 


Examination 
of  Books 
by  Internal 
Revenue 
Officers 


"  For  the  purpose  of  verifying  any  return,  made  pur- 
suant to  this  act,  the  Commissioner  of  Internal  Revenue 
may,  by  any  duly  authorized  revenue  agent  or  deputy 
collector,  cause  the  books  of  such  corporation  to  be 
examined,  and  if  such  examination  discloses  that  the 
corporation  is  liable  to  tax  in  addition  to  that  previously 
assessed,  or  assessable,  the  same  shall  be  assessed  and 
shall  be  payable  immediately  upon  notice  and  demand. 
For  the  purpose  of  such  examination,  the  books  of  cor- 
porations shall  be  open  to  the  examining  officer,  or  shall 
be  produced  for  this  purpose  upon  summons  issued  by 
any  properly  authorized  officer."  (Regulations  33,  Ar- 
ticle 186.) 


88  INCOME  TAX — LAW  AND  ACCOUNTING 

Although  there  has,  as  yet,  been  no  ruling  upon  any 
phase  of  accounting  under  the  present  income  tax  law, 
it  is  clear  that  corporations  or  individuals  keeping  ac- 
counts upon  the  plan  of  accruing  income  and  expenses 
or  deferring  prepayments,  may  now  prepare  their  returns 
accordingly.  From  an  accounting  viewpoint  this  is  the 
only  correct  method  whereby  the  true  profit  or  loss  of 
a  business  may  be  deduced.  But  the  method,  if  employed, 
must  be  used  consistently  and  with  limitation.  In  no  case 
shall  an  expense  account  for  a  tax  year  or  fiscal  year  be 
charged  with  a  greater  amount  than  is  actually  incurred 
or  accrued  therein  and  for  which  the  business  has  re- 
ceived value  in  such  fiscal  or  tax  year;  that  is  to  say, 
no  deduction  shall  be  made  of  an  amount  in  excess  of 
that  actually  chargeable  against  the  operations  of  the 
year  (fiscal  or  calendar)  for  which  the  return  is  made. 
Prepayments  may  be  deferred,  that  is,  such  part  of  ex- 
penses as  are  prepaid  may  be  deducted  from  expenses 
and  treated  as  "  deferred  assets  "  or  "  prepayments  "  in 
the  balance  sheet. 

The  accounts  most  commonly  accrued  or  deferred  are 
interest,  taxes,  insurance,  rents,  salaries,  commissions 
and  income  taxes  withheld,  but  the  principle  is  applicable 
to  all  classes  of  income  and  expenses. 

No  accruals  shall  be  deducted  from  income  unless  they 
appear  upon  the  books  of  account  and  represent  ex- 
penses actually  incurred  or  accrued  during  the  year. 

Wherever  the  expressions  "  actually  paid  "  or  "  paid 
during  the  year  "  appear  herein,  when  applied  to  indi- 
viduals or  corporations  keeping  their  accounts  upon  the 
"  accrual  basis,"  such  accruals  are  comprehended  therein. 

Apart  from  facilitating  the  preparation  of  income  tax 
returns,  bookkeeping  suggestions  would  be  out  of  place 
here.  But  a  great  deal  of  time  and  work  may  be  saved 
to  the  bookkeeper  and  to  the  executive  who  is  responsible 
for  the  contents  of  the  report,  by  employing  a  method 
of  bookkeeping  that  will,  without  analysis  of  accounts, 


BOOKKEEPING   SUGGESTIONS 


89 


Return 
Sales 


present  to  immediate  view  in  a  trial  balance,  the  compo- 
nent parts  called  for  by  the  income  tax  return.  This 
can  be  accomplished  only  by  a  suitable  distribution  of 
accounts  of  income  and  expenses,  assets  and  liabilities. 

Sales  Merchandise  sales  should  be  credited  to  a  separate 

account  in  the  ledger.  Where  departmental  accounts  are 
kept,  the  ledger  should  contain  a  separate  sales  account 
for  each  department  or  each  class  of  commodity.  The 
sales  called  for  by  the  supplementary  statement  of  the 
income  tax  return  under  "  Gross  Income  from  Opera- 
tions "  should  be  the  net  sales,  i.  e.,  gross  sales  (amounts 
charged  to  customers)  less  returns,  allowances  and  dis- 
counts allowed  on  sales. 

Goods  returned  by  customers  should  be  charged  to  a 
separate  account  unless  they  are,  in  aggregate,  so  small 
a  proportion  of  the  sales  that  a  separate  account  would 
not  be  justified.  If  no  separate  account  is  kept,  the  re- 
turns should  be  charged  to  Sales  Account.  The  advan- 
tage of  a  separation — which  bears  no  relation  to  the 
preparation  of  a  tax  report — is  that  a  monthly  trial  bal- 
ance discloses,  at  a  glance,  the  proportion  of  returns  to 
the  volume  of  sales. 

As  stated  under  "  Sales,"  goods  returned  by  custom- 
ers should,  for  the  income  tax  report,  be  deducted  from 
amount  shown  by  Sales  Account  (Gross  Sales). 

Allowances  Ordinary  allowances  on  goods  sold,  such  as  claims 
by  reason  of  breakage,  short  shipment,  overcharges,  de- 
fective goods,  etc.,  should  be  charged  to  an  Allowance 
Account  and  deducted  from  sales  for  the  income  tax 
return.  Exceptional  allowances,  such  as  unrecovered 
shipments  lost  in  transit,  for  which  the  shipper  is  re- 
sponsible and  cannot  recover  from  the  transportation 
company,  should  be  charged  to  an  account  that  by  its 
title  is  descriptive  of  its  contents,  as  "  Goods  Lost  in 
Transit,"  and  should  be  stated  in  the  income  tax  return 
and  supplementary  statement  in  item  5  (a).  All  losses, 


90 


INCOME   TAX — LAW   AND   ACCOUNTING 


Discounts 
Allowed 

Discounts 
Received 


Rebates 


to  be  deductible  from  the  income  tax  return,  must  be 
charged  off  in  the  year  sustained. 

"  Discounts  allowed  "  on  sales  should  be  charged  to 
an  account  bearing  that  title.  "  Discounts  received  "  on 
goods  purchased  should  be  credited  to  a  separate  account 
so  entitled.  For  income  tax  purposes  discounts  allowed 
to  customers  are  a  reduction  of  the  gross  sales,  and 
discounts  received,  as  a  trade  allowance  or  for  prepay- 
ment of  goods  purchased,  are  a  reduction  of  the  cost  of 
goods  bought. 

Rebates  on  sales  that  are  allowed  by  way  of  commis- 
sions, or  as  a  reward  for  selling  certain  quantities  of 
commodities,  should  be  carried  in  a  separate  account  in 
the  ledger  and  treated  in  the  income  tax  return  as  a 
general  expense  under  "  Deductions  "  and  included  in 
"  Commissions "  in  the  supplementary  statement,  item 
4  (a)  1,  under  "  Expenses,  General." 

Purchases  Merchandise  purchased  should  be  charged  to  a 
"  Purchase  Account "  in  the  ledger.  As  an  income  tax 
deduction  in  the  ascertainment  of  "  Gross  Income  from 
Operations,"  there  should  be  added  to  the  purchases  all 
transportation  charges  paid  or  incurred  thereon.  There 
should  be  deducted:  returns,  claims,  discounts  received 
and  "  anticipations  "  received. 

A  manufacturing  corporation  employing  a  cost  system 
that  is  an  integral  part  of  the  bookkeeping  system,  i.  e., 
where  such  system  is  comprehended  in  the  general  books 
of  account  and  included  in  the  general  ledger  trial  bal- 
ance, may  state  as  "  Purchases  "  the  cost  of  manufac- 
tured goods,  as  derived  from  such  cost  system.  Mere 
cost  memoranda,  data,  or  books  of  account,  however, 
that  are  not  subject  to  proof  of  correctness,  are  not 
sufficiently  reliable  records  from  which  to  prepare  in- 
come tax  returns.  It  is  not  necessary  that  the  cost 
accounts  should  be  kept  in  the  same  binder  or  within 
the  same  cover  as  the  general  ledger,  but,  in  summary, 


BOOKKEEPING   SUGGESTIONS 


91 


Freight  on 
Sales 

Freight  on 
Purchases 


Inventories 


the  costs  should  be  controlled  by  general  ledger  accounts. 
For  further  discussion  of  this  subject,  see  "  Manufactur- 
ing Corporations  Operating  Cost-systems,"  page  110. 

Where  a  cost-system  does  not  answer  the  requirements 
of  proof  as  to  accuracy  of  results  the  form  of  return 
(Form  1031)  should  be  adhered  to.  Corporations  doing 
a  mercantile  business  (buying  and  selling  raw  materials 
or  finished  products  manufactured  by  others)  as  well 
as  a  manufacturing  business,  should  conform  to  the 
classification  contained  in  the  return,  unless  the  separate 
departments  are  clearly  differentiated  in  the  books  of 
account. 

Transportation  charges  on  goods  sold  (freight  out) 
should  be  kept  separate  from  those  on  goods  purchased 
(freight  in).  Freight  on  goods  sold,  for  income  tax  pur- 
poses, is  an  expense  of  doing  business  and  should  be  in- 
cluded in  item  4  (a)  under  "  Deductions,"  and  in  the 
supplementary  statement  in  item  4  (a)  7.  Transportation 
charges  on  goods  bought  increases  their  cost  and  should 
be  added  to  the  cost  of  purchases.  Separate  accounts  in 
the  ledger  should  be  kept  of  freight  on  sales  and  freight 
on  purchases,  to  be  known,  respectively,  as  "  Freight 
Out "  and  "  Freight  In."  Items  of  expressage  and 
cartage  may  respectively  be  charged  or  credited  to  these 
accounts.  In  case  where  own  trucks  are  used  the  appor- 
tionment may  be  estimated  based  upon  the  cost  of  stable 
or  auto  expenses,  labor,  etc. 

Stock  on  hand  should  be  carried  in  a  separate  account 
in  the  ledger  under  the  title  of  "  Inventory  Account." 
Where  freight  and  other  transportation  charges  have 
been  added  to  the  purchases,  the  proportion  added 
thereto  should,  technically,  be  included  in  the  inventory. 
But  this  would  have  to  be  approximated  at  best,  and  may, 
as  an  expediency,  be  disregarded  except  where  it  is  a 
very  material  item  or  where  the  computation  is  rendered 
simple. 


92 


INCOME  TAX — LAW  AND  ACCOUNTING 


For  income  tax  purposes,  inventories  should  be  com- 
puted at  cost  and  so  stated  in  3  (a)  of  supplementary 
statement  of  the  return.  The  deduction  of  depreciation 
from  the  cost  of  commodities  dealt  in  is  prohibited. 
(See  "Stock  on  Hand,"  page  83.)  "  No  part  of  the 
overhead  expenses  should  be  added  to  the  inventory." 

Care  should  be  exercised  to  see  that  the  amount  ot 
stock  on  hand  reported  at  the  beginning  of  a  tax  year 
is  the  same  amount  as  that  shown  as  on  hand  at  the  close 
of  the  preceding  year.  An  increase  in  the  amount  at  the 
beginning  of  a  year  over  that  stated  at  the  close  of  the 
previous  year  would  result  in  a  decrease  in  the  gross 
income,  which,  in  the  absence  of  a  clerical  or  technical 
error,  would  be  prima  facie  evidence  of  fraud. 

Rentals  Rents  received  should  be  kept  in  a  separate  account 

from  rents  paid.  Receipts  of  rent,  where  the  corpora- 
tion owns  the  rented  property,  must  be  reported  as  in- 
come, whereas  rents  paid  are  deductible  as  general  ex- 
penses. The  amount  paid  on  a  leasehold  may  be  prorated 
over  the  period  of  the  lease  and  deducted  annually  as 
rent  paid  during  the  year.  This  is  also  true  where  a 
building,  reverting  to  the  landlord,  is  erected  on  leased 
land;  the  annual  rate  of  deduction  being  the  fraction: 
one,  as  the  numerator,  and  the  number  of  years  of  the 
leasehold,  as  the  denominator,  multiplied  by  the  cost  of 
the  building  and  improvements.  The  cost  of  such  im- 
provements should  be  charged  to  a  "  Leasehold  Account  " 
in  the  ledger  and  the  amount  charged  off  annually  should 
be  stated  in  the  income  tax  return  in  item  4  (a)  3,  under 
"  Expenses,  General "  in  the  supplementary  statement. 
Ordinary  rentals  paid  should  also  be  stated  in  the 
supplementary  statement  under  "  Expenses,  General "  in 
item  4  (a)  3,  the  total  of  which  appears  in  the  report  un- 
der "  Deductions  "  in  item  4  (a). 

Royalties  Royalties  received  are  returnable  as  income  from  ren- 

tals.    Where  royalties  are  both  paid  and  received,  it  is 


BOOKKEEPING   SUGGESTIONS 


93 


Interest 
Received 


Interest 
Paid 


advisable  to  keep  a  separate  account  for  each  in  the 
ledger,  designating  them  "  Royalties  Received "  and 
"  Royalties  Paid/'  because  they  are  separately  reported 
in  the  return  of  net  income.  Royalties  paid  are  return- 
able under  4  (b)  "  Payments  in  Lieu  of  Rent."  Royal- 
ties received  should  be  included  in  item  3  (b)  "  From 
Rentals  "  under  "  Gross  Income." 

Interest  received  and  interest  paid  should  be  respec- 
tively credited  and  charged  to  separate  ledger  accounts, 
and  each  of  them  should  be  further  subdivided  accord- 
ing to  the  separation  called  for  by  the  tax  return,  as 
follows : 

Interest  received  on  bonds  or  other  obligations  of  the 
United  States,  or  its  possessions,  from  a  State,  Munici- 
pality or  other  political  subdivision,  although  not  subject 
to  the  income  tax,  must  be  reported  as  income  in  3  (c) 
of  the  supplementary  statement  and  should  be  credited 
to  an  account  in  the  ledger  entitled  "  Interest  Received 
on  Government  Securities." 

All  interest,  other  than  that  received  on  Government 
bonds  or  obligations,  except  "  anticipations,"  should  be 
credited  to  a  general  "  Interest  Received  Account,"  and 
should  be  reported  in  item  3  (c)  under  "  Gross  Income  " 
in  the  return. 

"Anticipations  " — interest  received  for  the  prepayment 
of  accounts  payable — should  be  credited  to  "Anticipation 
Account "  and  for  income  tax  purposes  are  deductible 
from  the  cost  of  purchases,  the  same  as  are  discounts 
received. 

Interest  paid  by  a  corporation  should  be  classified  as 
follows : 

1.  "  Interest  paid  on  indebtedness,  wholly  secured  by 
collateral,  the  subject  of  sale  in  the  ordinary  business  of 
the  corporation,"  should  be  charged  to  an  account  en- 
titled "  Interest  Paid  on  Secured  Debts  "  and  reported  in 
the  return  under  "  Expenses,  General,"  item  4  (a)  5  in 
the  supplementary  statement. 


94  INCOME   TAX — LAW  AND   ACCOUNTING 

2.  Interest    paid    on    mortgages  secured  by  property 
which  the  corporation  occupies  but  does  not  own  and 
has  no  equity  in,  should  be  charged  to  "  Interest  Paid  in 
Lieu  of  Rent "  and  stated  in  the  return  under  "  Deduc- 
tions "  in  item  4  (b). 

3.  All  interest  paid  on  bonds  and  other  indebtedness 
should  be  charged  to  "  Interest  Paid  Account "  and  stated 
in  the  return  in  item  6  (a)  under  "  Deductions."      The 
amount  of  interest  deductible  under    this    item    is    the 
amount  actually  paid  within  the  year  on  an  amount  of 
bonded  or  other  indebtedness  not  in  excess  of  the  sum 
of  one  of  the  subdivisions  of  "  A  "  plus  "  B  " : 

A.  1.  The  paid-up  capital  stock  outstanding  at  the 

close  of  the  year, 
or 

2.  If  the  capital  stock  has  no  par  or  nominal  value, 

the  amount  of  cash  or  its  equivalent  paid  or 
transferred  to  the  corporation  as  a  consid- 
eration for  shares  issued  and  outstanding  at 
the  close  of  the  year, 
or 

3.  If  no  capital  stock,  the  entire  amount  of  capi- 

tal (not  including  liabilities)  employed  in  the 
business  at  the  close  of  the  year, 
plus 

B.  One-half  of  the  interest-bearing  indebtedness  out- 

standing at  the  close  of  the  year. 

For  example,  in  the  case  of  a  corporation  having,  at 
the  close  of  the  year,  a  capital  stock  of  $500,000  and 
bonded  and  other  indebtedness  of  $200,000,  the  deduct- 
ible interest,  at  6  per  cent,  per  annum,  would  not  exceed : 

6  per  cent,  on  $500,000  $30,000 

6  per  cent,  on     100,000  6,000 


Total,  6  per  cent,  on  $600,000  $36,000 


BOOKKEEPING   SUGGESTIONS  95 

Should  the  actual  interest  paid  during  the  year  exceed 
the  sum  of  $36,000,  in  the  example  cited,  the  excess  would 
not  be  deductible  and  only  $36,000  should  be  entered  in 
item  6  (a)  of  the  report  under  "  Deductions." 

In  the  case  of  subdivision  A,  3,  having  no  capital  stock, 
the  "  capital  employed  in  the  business  *  *  *  contem- 
plates the  entire  capital  paid  in  by  the  members  of  the 
company,  including  so  much  of  the  accumulated  sur- 
plus as  is  not  in  excess  of  the  needs  of  the  business, 
but  does  not  include  any  borrowed  capital  or  interest- 
bearing  indebtedness." 

In  the  supplementary  statement  under  item  6  (a)  "  In- 
terest Deductible "  should  be  listed  "  all  forms  of  in- 
debtedness upon  which  interest  was  paid,"  stating  as  to 
each: 

1.  Name    or    kind    of    obligation   (Bonds  Payable, 

Mortgages  Payable,  Bills  Payable,  etc.), 

2.  Amount  of  principal  of  each  class, 

3.  Rate  of  interest  on  each  class, 

4.  Amount  of  interest  paid  on  each  class  of  obliga- 

tions. 

Irrespective  of  the  amount  deducted  in  the  main  re- 
port under  "  Deductions,"  the  amount  stated  as  "  in- 
terest paid  "  in  the  supplementary  statement  is  the  total 
amount  paid  during  the  year.  The  amount  deducted 
cannot  exceed  the  total  amount  actually  paid,  but,  by  the 
limitation  of  law  hereinbefore  stated,  may  be  less. 

No  dividends  or  so-called  interest  on  any  kind  of  capi- 
tal stock  are  deductible ;  "  guaranteed,"  cumulative  or 
preferred  dividends  are  no  exceptions. 

Interest  Interest  on  any  bonds  of  a  corporation  secured  by 

"  Debenture  mortgage  on  its  real  or  personal  property  is  deductible 
Bonds"         in  a  return  of  net  income  of  the  corporation. 

Where,  however,  a  corporation  issues  so-called  "de- 
benture bonds  "  secured  by  mortgages  on  real  estate  made 


96  INCOME   TAX — LAW  AND   ACCOUNTING 

by  borrowers  from  the  corporation  in  favor  of  such 
corporation,  the  interest  on  such  bonds  is  not  deductible 
from  the  taxable  income.  In  the  case  of  Middlesex 
Banking  Company  vs.  Robert  O.  Eaton,  Collector  (221 
Fed.,  86),  affirmed  by  the  United  States  Circuit  Court 
of  Appeals,  it  was  found  upon  the  trial  that  the  plain- 
tiff, under  its  charter  had  the  powers  of  a  safe-deposit 
company,  of  a  bank  of  deposit,  and  of  a  company  to 
sell  securities,  but  that  its  principal  business  was  the 
sale  of  securities.  Judge  Ward  of  the  United  States  Cir- 
cuit Court  of  Appeals  found  that  "  practically  the  whole 
of  the  business  done  by  the  plaintiff  during  the  years  in 
question  was  the  sale  of  its  own  obligations,  called  '  de- 
benture bonds,'  secured  by  mortgages  on  property  in  the 
South  and  West,  deposited  with  the  Columbia  Trust  Co. 
as  trustee  for  the  bondholders,  and  of  the  obligations  of 
borrowers  to  the  plaintiff,  secured  by  mortgages,  which, 
accompanied  by  its  own  interest  coupons  for  a  less  rate 
of  interest  than  it  receives  from  the  borrowers,  it  guar- 
antees as  to  both  principal  and  interest  and  sells  to  pur- 
chasers. These  latter  are  called  '  guaranteed  real  estate 
securities.'  Both  these  forms  of  securities  the  plaintiff 
sells  throughout  the  East  by  means  of  agents,  and  its 
profit  in  each  case  is  represented  by  the  difference  be- 
tween the  rate  of  interest  it  receives  from  its  southern 
and  western  borrowers  and  the  interest  which  it  pays 
to  the  eastern  purchasers  of  the  obligations." 

The  plaintiff's  theory  was  that  the  interest  in  question 
was  paid  upon  money  deposited  with  it  and  as  such  was 
deductible;  this  the  Court  disposed  of  in  the  following 
language :  "  Without  stopping  to  analyze  the  charter 
powers  of  the  plaintiff  and  to  determine  whether  it  is  or 
is  not  a  bank  or  banking  association  and,  whether,  if  so, 
it  has  not  also  other  and  different  powers,  we  think  it 
perfectly  clear  that  the  interest  in  question  is  not  interest 
upon  money  deposited  with  it,  but  is  interest  paid  on  its 
own  obligations  or  on  the  obligations  of  others  guar- 


BOOKKEEPING   SUGGESTIONS  97 

anteed  by  it  which  it  has  sold  to  the  investing  public. 
The  purchase  price  is  no  more  money  deposited  with  the 
plaintiff  at  interest  than  is  money  paid  to  a  railroad  com- 
pany for  the  purchase  of  its  bonds.  The  transaction  is 
not  a  banking  transaction  at  all  like  the  giving  of  a  pass 
book  or  a  certificate  of  deposit  to  a  depositor,  but  a  busi- 
ness of  selling  securities  to  investors.  Selden  vs.  Equi- 
table Trust  Co.  (94  U.  S.,  419)." 

F.  A.  Cleveland,  in  his  work  on  "  Funds  and  Their 
Uses/'  says  that :  "  The  term  debenture  bond  is  the 
most  loosely  used  of  any  of  the  terms  descriptive  or  sug- 
gestive of  financial  instruments."  The  test  of  deduci- 
bility of  interest  on  such  bonds  is  whether  it  is  actually 
an  "  expense  of  the  business,"  and  to  be  such  it  must  be 
paid  upon  an  actual  obligation  of  the  company,  not 
merely  upon  an  "  evidence  of  indebtedness."  Interest 
paid  as  a  distribution  of  profits  is  not  deductible  in  an 
income  tax  return. 

Dividends  Dividends  received  by  a  corporation  should  be  credited 

to  "  Dividends  Received  Account  "  and  in  the  income  tax 
return  included  in  item  3  (d)  under  "  Gross  Income." 
Dividends  received  out  of  earnings  accrued  prior  to 
March  1,  1913,  are  not  taxable  to  the  recipient. 

Stock  dividends  constitute  taxable  income  to  the 
amount  of  their  cash  value  and  "  such  cash  value  is  held 
to  be  the  proportionate  share  of  the  surplus  accrued  to 
the  paying  corporation  since  March  1,  1913,  as  is  rep- 
resented by  the  stock  distributed  or  ordered  to  be  dis- 
tributed to  the  receiving  corporation." 

Inasmuch  as  corporations  pay  the  normal  tax  (2%) 
on  their  net  earnings,  dividends  paid  to  individual  stock- 
holders out  of  such  net  earnings  are  free  from  a  further 
normal  tax.  But  that  is  not  so  in  the  case  of  dividends 
paid  to  a  corporation  stockholder.  Such  corporate  stock- 
holder is  again  taxable  on  its  net  income,  which  includes 
the  dividends  received.  Hence,  on  dividends  paid  by  one 


98 


INCOME   TAX — LAW  AND   ACCOUNTING 


Income 
Sundry 
Sources 


corporation  to  another  corporation,  the  normal  tax  is 
paid  twice. 

It  is  not  necessary  that  the  dividends  be  actually  paid 
either  by  cash  or  stock,  because  "  dividends  shall  be  held 
to  mean  any  distribution  made  or  ordered  to  be  made 
by  a  corporation  out  of  its  earnings."  Therefore,  a 
mere  credit  on  the  books  of  the  issuing  corporation  is 
sufficient  to  obligate  the  recipient  to  include  the  amount 
of  such  credit  applicable  to  him  or  it  (a  corporation)  as 
income  in  his  or  its  return  of  net  income. 

All  income,  other  than  that  derived  from  trading,  rent- 
als, interest,  dividends  received,  and  income  from  the 
sale  of  capital  assets,  should  be  credited  in  the  ledger  to 
an  account  "  Income  from  Sundry  Sources  "  and  should 
be  stated  in  item  3  (e)  under  "  Gross  Income."  Profits 
from  the  sale  of  capital  assets  should  be  included  in  this 
item  of  the  return.  For  treatment  of  the  account  in  the 
ledger,  and  method  of  computing  profit  from  the  sale  of 
capital  assets,  see  page  105. 

In  the  supplementary  statement,  item  3  (e),  all  income 
from  sources  other  than  those  specifically  called  for  in 
the  return,  which  is  subject  to  tax,  should  be  itemized. 

Labor,  These  items  are  called  for  in  toto  in  the  supplementary 

CommiSons  statement  of  tne  report,  item  4  (a)  1,  under  "  Expenses, 
General."  "  Labor  "  and  "  wages  "  for  the  purpose  of 
the  income  tax  return,  apply  to  all  wages,  direct  and  in- 
direct (except  where  a  cost-system  is  operated,  see  page 
110).  All  salaries,  other  than  those  of  officers  of  the 
corporation  which  are  stated  separately  in  item  4  (a)  6, 
should  be  included  in  "  Labor,  Wages  and  Commissions." 
Bonus  and  profit  sharing  payments  to  employees  other 
than  officers  which  are  not  gratuities,  but  additional  pay 
for  services  actually  rendered,  should  be  included  in  this 
deduction.  A  separate  ledger  account  should  be  kept  to 
which  items  of  this  class  will  be  charged. 

Separate  ledger  accounts  should  be  kept  for  wages  and 


BOOKKEEPING    SUGGESTIONS 


99 


Fuel,  Light, 
Power,  etc. 


Repairs, 
Ordinary 
and 
Incidental 


commissions,  respectively,  and  each  of  them  should  be 
further  subdivided  into  separate  accounts  according  to 
requirements  of  the  business.  For  example,  wages  paid 
in  connection  with  production  (Productive  Wages), 
office  salaries,  salaries  of  salesmen,  etc.,  should  be  car- 
ried in  separate  accounts  to  facilitate  the  preparation  of 
intelligible  Profit  and  Loss  Accounts  and  for  purposes 
of  comparison  of  various  departmental  expenses  of  dif- 
ferent periods. 

Commissions,  also,  should  be  kept  in  accounts,  that, 
by  their  title,  designate  whether  they  are  applicable  to 
cost  of  production,  administration  or  selling  expenses. 

Income  from  commissions  should  be  credited  to  a 
"  Commissions  Received  Account "  and  included  in  item 
3  (e)  under  "  Gross  Income  "  of  the  tax  return.  Where 
commissions  are  both  received  and  paid  they  should 
always  be  credited  and  charged,  respectively,  to  separate 
ledger  accounts  that  by  their  title  are  descriptive  of  their 
contents. 

These  items,  called  for  in  the  supplementary  state- 
ment, item  4  (a)  2,  under  "  Expenses,  General,"  should 
contain  in  toto  only  the  cost  of  supplies  and  service  pur- 
chased, such  as  coal,  gas,  electricity,  power,  etc.,  and 
should  not  include  labor  of  engineers,  firemen,  etc.,  which 
latter  are  called  for  by  item  4  (a)  1. 

Ordinarily  the  items  to  be  included  in  line  4  (a)  2  are 
charged  in  an  account  called  "  Light,  Heat  and  Power." 
To  make  easier  the  preparation  of  the  tax  return  such 
accounts  should  be  subdivided,  one  for  labor,  and  the 
other  for  supplies  consumed  in  the  production  of  light, 
heat  and  power,  as  "  Light,  Heat  and  Power,  Labor " 
and  "  Light,  Heat  and  Power,  Supplies." 

For  the  purpose  of  the  income  tax  return,  it  is  neces- 
sary only  to  keep  one  general  "  Repair  Account "  of 
materials.  For  accounting  purposes,  however,  repairs 
should  be  subdivided  according  to  requirements,  as  Re- 


100  INCOME   TAX — LAW  AND   ACCOUNTING 

pairs  to  Machinery  and  Plant,  Repairs  to  Buildings,  etc. 
To  more  easily  prepare  the  tax  report  these  accounts 
again  should  be  divided  into  Repairs — Materials  and 
Supplies,  and  Repairs — Wages,  because  they  are  called 
for  separately.  The  separation  of  wages  and  materials 
only  applies  where  the  repairs  are  made  by  own  em- 
ployees of  the  corporation.  Where  the  repairs  are  made 
by  "  outsiders  "  the  total  cost  of  repairs  may  be  charged 
in  item  4  (a)  4. 

Care  should  be  exercised  to  differentiate  repairs  and 
renewals  from  improvements  and  betterments ;  the  latter 
are  not  deductible  as  expenses.  A  mere  replacement  that 
is  not  an  improvement  and  does  not  enhance  the  material 
value  is  chargeable  as  a  repair;  the  same  is  true  of  that 
which  merely  maintains  efficiency. 

Salaries  of  A  separate  ledger  account,  to  which  should  be  charged 
Officers  aii  salaries  of  officers,  should  be  kept.  The  amount  of 
such  salaries  will  be  stated  in  the  supplementary  state- 
ment of  the  return  in  item  4  (a)  6,  under  "  Expenses, 
General."  A  salary  is,  in  the  ordinary  acceptation  of  the 
word,  a  compensation  that  is  fixed  by  agreement  in 
advance.  Salaries,  to  be  deductible,  shall  not  be  based 
upon  stockholdings ;  they  must  be  a  business  expense  and 
not  a  distribution  of  profits.  A  distribution  of  profits 
is  not  deductible  as  an  expense. 

Where,  however,  "  special  payments,  often  designated 
as  bonuses,  are  made  to  officers  or  employees  of  corpo- 
rations, pursuant  to  a  contract,  express  or  implied,  as 
additional  compensation  for  services  rendered,  which 
payments,  when  added  to  the  stipulated  salaries,  do  not 
exceed  a  reasonable  compensation  for  the  services  ren- 
dered, such  payments  may  be  regarded  as  a  part  of  the 
wages  or  hire  of  the  officer  or  employee,  and,  as  such, 
may  allowably  be  deducted  from  gross  income  as  a  busi- 
ness expense."  In  such  case  the  bonus  or  additional 
compensation  of  an  officer  should  be  included  in  item 


BOOKKEEPING   StJGGESTiQ.N'S  lOi 

4  (a)  6,  "  Salaries  of  Officers."  But  "  this  ruling  cun- 
templates  that  such  payments  are  conditioned  upon  the 
services  rendered  by  the  employee  and  not  upon  the 
earnings  of  the  corporation.  If  it  should  appear  that 
the  additional  or  special  payments  are  dependent  upon 
the  earnings  of  the  company,  rather  than  upon  the  serv- 
ices rendered,  or  if  such  payments  are  made  only  occa- 
sionally, and  then,  at  the  option  of  the  corporation,  as 
a  sort  of  thank-offering  because  of  a  prosperous  year, 
and  not  in  pursuance  of  a  fixed  policy  or  practice,  or  any 
contract,  express  or  implied,  it  will  be  held  that  such  pay- 
ments are  gratuities  and,  as  such,  are  not  properly  de- 
ductible from  gross  income." 

Voluntary  contributions  or  donations,  such  as  "  Christ- 
mas gifts  "  are  riot  deductible.  But  a  payment  by  an 
employer  to  his  employee,  irrespective  of  when  made, 
during  the  holiday  or  any  other  season  of  the  year, 
in  consideration  of  services  rendered,  as  extra  compen- 
sation, is  deductible  by  the  payer. 

In  addition  to  the  accounts,  the  balances  of  which  are 
separately  called  for  by  the  return,  every  mercantile 
concern  has  more  or  less  additional  expenses  for  which 
separate  accounts,  according  to  requirements,  should  be 
kept,  such  as: 

Freight  on  Sales  Insurance 

Packing  Supplies  Postage 

Shipping  Supplies  Stationery  &  Printing 

Stable  Expense  Telegraph  &  Telephone 

Auto  Expense  Legal  Expense 

Advertising  Auditing  Expense 

Traveling  Expense  General  Office  Expense 

In  the  case  of  a  manufacturing  company,  that  does 
not  operate  a  cost-system  as  an  integral  part  of  the  book- 
keeping system  (see  page  110)  an  intelligible  classifica- 
tion would  require  such  additional  accounts  as  General 
Factory  Expense,  Production  Supplies,  etc. 


.INCOHE.TAX  —  L 


AND   ACCOUNTING 


All  expenses  that  are  not  separately  provided  for  in 
the  return,  such  as  those  just  mentioned,  should  be 
stated  in  item  4  (a)  7  "  Other  Expenditures "  in  the 
supplementary  statement.  It  is  not  necessary  to  state 
each  account  separately;  they  may  be  combined  so  as  to 
include  them  all  in  five  groups.  Each  group  should  con- 
tain items  related  to  each  other  or  coming  under  the 
same  general  head  of  production,  administration  or  sell- 
ing expenses.  For  example,  they  may  be  grouped  as  fol- 
lows: 

Packing  and  Shipping  Supplies, 
Stable  and  Auto  Expense, 
Advertising  and  Traveling  Expense, 
Postage,  Stationery,  Telegraph  &  Telephone, 
Legal  and  Auditing  Expense. 

Items  that  cannot  be  classified  under  a  general  head 
may  be  stated  as  "  Miscellaneous  Unclassified  Expenses/' 
but  the  amount  so  stated  should  be  comparatively  small. 

Import  duties  and  import  taxes  should  be  charged  to 
"  Duties  Account "  in  the  ledger  and  included  in  the 
return  as  expense  in  item  4  (a)  under  "  Deductions  " 
and  in  the  supplementary  statement  in  item  4  (a)  7. 
These  items  should  not  be  deducted  as  taxes. 

The  names  of  all  officers  and  employees  receiving  sal- 
aries of  $3,000  or  more  per  anum,  shall  be  reported  in 
the  supplementary  statement  in  item  4  (a)  8,  under 
VVMholding  «ExpenseSj  General."  The  total  of  this  column  does 
not  enter  into  the  main  report  because  the  salaries  here 
reported  are  included  under  "  Expenses,  General "  in 
item  4  (a)  1  and  4  (a)  6.  Salaries  paid  by  capital  stock, 
rentals  or  by  property  shall  be  stated  at  the  cash  value 
thereof.  Every  corporation  shall  withhold  for  the  year 
1916  1  per  cent,  of  the  amount  paid  to  officers  and  em- 
ployees, and  every  year  thereafter  2  per  cent,  on  all 
salaries  paid  in  excess  of  the  amount  of  exemption  to 


Customs 
Duties 


Salaries  in 
Excess  of 

$3,000 


BOOKKEEPING   SUGGESTIONS 


103 


Report  of 


Bad 


which  the  recipient  is  entitled,  namely,  unmarried  per- 
sons $3,000,  and  married  persons  or  head  of  family 
$4,000. 

A  corporation  shall  not  deduct  such  exemption  unless 
the  individual  entitled  thereto  files  with  it  a  certificate  of 
exemption  in  due  time. 

All  individuals  receiving  income  in  excess  of  $3,000 
per  annum  must  make  and  file  return  on  Form  1040  in 
addition  to  the  returns  of  their  employers. 

In  addition  to  the  return  of  annual  net  income  (Form 
1031)  every  corporation,  paying  salaries  of  $3,000  or 
more  in  the  year,  must  make  a  return  on  Form  1042 
Revised  (Tax  Withheld  at  Source,  etc.).  This  is  com- 
pulsory, and  failure  to  file  such  additional  return  in  due 
time  subjects  the  corporation  to  a  fine  of  from  $20  to 
$1,000.  Under  the  old  income  tax  law  fines  were  im- 
posed without  exception  for  failure  to  file  return  of 
taxes  withheld. 

Uncollectible  accounts  receivable  should  be  charged  to 
a  separate  account  that  by  its  title  designates  what  it  con- 
tains, such  as  Bad  Debts,  Uncollectible  Accounts  or  Bad 
Accounts.  Bad  debts  should  not  be  charged  to  Profit 
and  Loss  Account  until  at  the  end  of  the  fiscal  period, 
when  the  books  are  closed. 

Rulings  direct  that  accounts  shall  be  deducted  only 
when  they  have  been  actually  ascertained  to  be  worth- 
less. Reserves  to  provide  for  anticipated  bad  debts  are 
not  deductible.  The  accounts  deducted  must  be  charged 
off  in  the  books  of  account  during  the  year  for  which  the 
return  is  made,  wherein  the  accounts  are  deducted. 

Payments  received  on  accounts  after  they  have  been 
charged  off  should  be  credited  to  Income  from  Bad  Debts 
Account  and  stated  in  the  return  as  income  "  From  other 
sources  "  under  "  Gross  Income."  The  total  of  such  in- 
come should  also  be  stated  in  the  supplementary  state- 
ment of  the  return  in  item  3  (e)  designating  the  same  as 
"  Income  from  Bad  Debts." 


104  INCOME   TAX — LAW  AND  ACCOUNTING 

In  the  return  of  corporations  it  is  not  required  to  state 
of  what  the  debts  charged  off  consist,  when  they  were 
created,  when  they  became  due,  how  they  were  actually 
ascertained  to  be  worthless,  etc.,  as  is  required  of  indi- 
viduals. But  the  fact  that  this  is  not  asked  of  them  does 
not  indicate  that  corporations  are  allowed  any  greater 
leeway  than  are  individuals. 

The  most  prevalent  causes  that  justify  the  charging  off 
of  accounts  receivable,  are : 

1.  Bankruptcy  of  debtor, 

2.  Assignment  by  debtor  for  benefit  of  creditors, 

3.  Execution  against  property  returned  unsatisfied, 

4.  Disappearance  of  debtor  leaving  no  assets, 

5.  Death  of  debtor  leaving  no  estate. 

The  test  of  charging  off  accounts  should  not  be  lim- 
ited to  the  reasons  stated  above.  Each  case  should  be 
determined  upon  the  particular  conditions  governing  it. 
The  language  of  rulings  under  the  old  income  tax  law 
would  indicate  that  legal  procedure  must  be  exhausted 
before  an  account  may  be  charged  off.  That,  no  doubt, 
is  true  in  many  cases,  but  all  accounts  do  not  justify  the 
expenditure  of  money  to  effect  collection. 

Bankruptcy,  as  a  general  rule,  is  sufficient  in  itself  to 
warrant  the  charging  off  of  an  account.  The  average 
per  cent,  of  dividends  paid  by  the  estates  of  bankrupts 
to  creditors  is  so  small  that  unless  it  is  apparent  that  an 
estate  has  good  assets,  in  a  reasonable  proportion  to  the 
liabilities,  the  entire  account  may  be  charged  off  at  once. 
Where  dividends  are  received  thereon,  such  dividends 
should  be  stated  as  income. 

The  question  as  to  when  an  account  is  "  actually  ascer- 
tained to  be  worthless  "  is  one  that  can  best  be  answered 
by  the  creditor,  and  he  might  better  err  on  the  side  of 
safety  than  to  permit  the  accumulation  of  uncollectible 
accounts. 


BOOKKEEPING   SUGGESTIONS  105 

Loss  by  Fire  losses  usually  involve  both  capital  and  current 

assets.  It  is  customary  immediately  after  a  fire  casualty 
to  proceed  to  arrive  at  an  inventory  based  on  cost  of  the 
destroyed,  partly  destroyed  and  damaged  merchandise 
for  insurance  purposes.  When  this  has  been  done  the 
value  of  the  destroyed  and  damaged  merchandise,  based 
on  such  inventory,  should  be  charged  to  an  account  in 
the  ledger  bearing  title  of  "  Fire  Loss  Account."  To 
this  account  should  also  be  charged  all  expenses  incurred 
in  the  adjustment  of  loss,  including  compensation  of 
adjusters,  if  any,  as  well  as  the  cost  of  repairs  and  re- 
placement of  buildings'  occasioned  by  the  fire.  The 
amount  recovered  from  insurance  companies  should  be 
credited  to  said  account.  The  debit  excess  of  the  Fire 
Loss  Account  will  then  represent  the  loss  sustained  by 
fire  which  should  be  included  in  the  income  tax  return, 
item  5  (a)  under  "  Deductions,"  and  under  the  same 
designation  in  the  supplementary  statement.  At  the  end 
of  the  fiscal  period  the  balance  of  Fire  Loss  Account 
should  be  charged  to  Profit  and  Loss  Account. 

Sales  of  The  profit  or  loss  on  the  sales  of  capital  assets  is  de- 

Assets'  termined  in  the  case  of  assets  acquired  subsequent  to 

March  1,  1913,  by  the  difference  between  the  cost  and 
selling  price.  If  the  assets  sold  were  acquired  prior  to 
March  1,  1913,  then  the  profit  or  loss  is  the  difference 
between  the  fair  market  value  on  March  1,  1913,  and 
the  selling  price. 

The  profit  or  loss  on  the  sale  of  capital  assets  should 
be  credited  or  charged, -respectively,  to  "  Income  on  Sales 
of  Capital  Assets  Account "  and  "  Loss  on  Sales  of 
Capital  Assets."  The  debit  of  such  accounts  will  be 
a  transfer  of  the  cost  or  fair  market  value,  as  the  case 
may  be,  from  the  asset  account  in  which  the  subject  of 
sale  had  previously  been  carried  in  the  ledger. 

According  to  the  supplementary  statement  of  the  in- 
come tax  return,  it  would  appear  that  the  profit  on  sales 


106  INCOME   TAX — LAW  AND   ACCOUNTING 

of  capital  assets  should  be  included  in  "  Gross  Income 
From  Operations."  This  is  obviously  wrong  in  prin- 
ciple, and  it  is  suggested  that  such  income  be  stated  in 
item  3  (e)  under  "  Gross  Income  "  calling  for  income 
"  From  other  sources."  Losses  on  sales  of  capital  assets 
should  be  included  in  item  5  (a)  under  "  Deductions." 

Depreciation  This  subject  has  been  treated  at  some  length  in  Chap- 
ter IV,  pages  68  to  85.  Suffice  it  to  say  here,  that  any 
amount  deducted  in  the  return  of  net  income  for  depre- 
ciation (item  5  (b)  in  both  the  report  and  supplementary 
statement)  must  be  actually  charged  off  in  the  ledger, 
either  on  the  asset  account  itself  or  in  a  negative  account, 
such  as,  a  Reserve  for  Depreciation. 

Depreciation  is  usually  charged  off  by  a  journal  entry, 
debiting  Depreciation  Account  and  crediting  Reserve  for 
Depreciation.  The  Depreciation  Account  is  closed  into 
the  Profit  and  Loss  Account  and  the  Reserve  Account 
remains  open  until  the  asset  that  it  offsets  (writes  down), 
is  either  sold  or  otherwise  disposed  of ;  then  the  difference 
between  the  cost  and  the  amount  written  off  in  past 
years,  plus  proceeds  of  sale,  is  charged  off  as  a  capital 
loss  or  profit,  as  the  case  may  be. 

Depletion  As  in  the  case  of  depreciation  of  property,  depletion 

of  mines  and  oil  or  gas  wells,  by  reason  of  exhaustion 
of  the  natural  product,  must  be  actually  charged  off  in 
the  ledger  of  the  corporation  seeking  the  deduction. 
Mere  memorandum  entries  thereof  are  insufficient.  The 
purpose  of  an  allowance  for  depletion  is  to  return  to  the 
corporation  the  capital  invested,  or,  in  case  of  purchase 
prior  to  March  1st,  1913,  an  amount  sufficient  to  return 
to  the  corporation  the  fair  market  value  of  such  de- 
posits as  at  that  date.  Depletion  should  be  entered  in 
item  5  (c)  of  both  the  return  proper  and  the  supple- 
mentary statement. 

Ledger  It  has  been  indicated  by  the  Commissioner  of  Internal 

Depletion  of   Revenue  that  in  order  to  render  a  claim  for  depletion 
Property        of  property  deductible  from  income  for  tax  purposes, 


BOOKKEEPING   SUGGESTIONS 


107 


it  is  insufficient  to  make  a  mere  journal  entry  thereof; 
it  must  be  actually  charged  off  in  the  general  ledger, 
either  against  the  asset  account  of  the  property  depleted, 
or  to  the  credit  of  "  Reserve  for  Depletion" ;  further, 
that  such  reserve  shall  be  deducted  from  the  asset  ac- 
count in  the  balance  sheet,  as  well  as  in  the  report  to 
the  stockholders.  The  amount  deducted  for  depletion 
in  an  income  tax  return  must,  in  fact,  be  charged  off 
in  such  way  that  it  reduces  the  asset  account  in  the 
general  ledger  by  the  amount  deducted  in  the  return  of 
annual  net  income. 

Taxes  should  be  charged  to  an  account  in  the  ledger 
bearing  that  title.  All  taxes  are  deductible  except  that: 

1.  Foreign  taxes  accruing  to  a  foreign  corporation 

are  not  deductible  from  income  derived  upon 
capital  invested  in  this  country. 

2.  Taxes  paid  for  local  benefits  are  not  deductible. 

3.  Taxes  paid  by  corporations  to  render  their  stock 

or  bonds  tax-free  are  not  deductible,  because 
such  taxes  are  primarily  obligations  of  their 
stockholders  and  bondholders. 

Foreign  taxes  paid  by  a  corporation  organized  under 
the  laws  of  any  State  of  the  United  States  are  deduct- 
ible, because  such  corporation  pays  an  income  tax  on 
its  entire  net  income  irrespective  of  where  such  income 
is  derived  or  where  its  capital  is  invested. 

Journal  entries  of  income  tax  items  may  be  avoided 
by  providing  a  separate  column  in  the  cash  book  for 
income  tax  deducted  at  the  source.  In  the  books  of  the 
recipient  of  income  on  which  the  tax  has  been  withheld, 
the  amount  deducted  becomes  a  charge  to  Tax  Deducted 
at  Source  Account.  Cash  Account  is  debited  with  the 
net  amount  of  cash  received,  the  tax  deducted  is  debited 
in  the  special  column  provided  therefor,  and  the  credit 
to  the  income  account  is  stated  at  the  gross  amount, 
inclusive  of  both  cash  received  and  tax  deducted.  The 


108 


INCOME   TAX — LAW  AND   ACCOUNTING 


Treatment 
of   Tax 
Withheld  at 
Source  on 
Books  of 
Payer  of 
Income 


Capital 
Stock 


income  tax  deducted  may  then  be  posted  in  totals  at  the 
end  of  each  month.  Tax  Deducted  at  Source  Account 
becomes  a  prepaid  expense  until  it  has  been  deducted 
from  the  annual  return  of  the  recipient.  This  is  appli- 
cable particularly  to  individuals,  but  will  also  apply  to 
such  foreign  corporations  as  are  subject  to  have  the  in- 
come tax  withheld. 

A  separate  column  should  also  be  provided  in  the  cash 
book  of  the  payer  of  income  that  is  subject  to  with- 
holding of  tax  at  the  source  of  payment.  This  applies 
to  individuals  and  corporations  generally.  The  net 
amount  of  cash  paid  (obligation,  less  tax  withheld)  is 
credited  to  Cash  Account.  The  amount  of  tax  with- 
held is  entered  in  the  special  column  and  credited  to  In- 
come Tax  Withheld  Account.  The  expense  chargeable 
is  debited  with  the  total  (cash  paid  plus  tax  withheld). 
Having  a  separate  column  in  the  cash  book  makes  it 
possible  to  post  the  items  withheld  in  totals  at  the  end 
of  each  month,  thereby  reducing  the  number  of  individual 
postings.  At  the  same  time  the  Income  Tax  Withheld 
Account  represents  at  all  times  the  amount  owing  to 
the  Government  by  reason  of  such  deductions.  When 
the  tax  is  paid  to  the  Collector  such  payment  is  charged 
to  the  Income  Tax  Withheld,  which  closes  the  account. 

Item  1  of  the  income  tax  return  calls  for  the  amount 
of  capital  stock  paid-in  and  outstanding.  This  does  not 
include  either  stock  unissued  or  "  treasury  stock."  If 
the  corporation  has  no  capital  stock,  then  it  should  state 
the  amount  of  capital  employed  in  the  business,  which, 
ordinarily,  is  the  excess  of  the  assets  over  liabilities,  i.  e., 
invested  capital  plus  surplus. 

Item  1,  in  the  supplementary  statement,  calls  for  the 
division  of  capital  stock  into  common  and  preferred.  If 
the  company  has  no  capital  stock  then  the  "  capital  em- 
ployed in  the  business"  should  be  stated.  (See  inter- 
pretation, page  95.) 


BOOKKEEPING   SUGGESTIONS  109 

Interest-  Item  2,  in  the  main  report,  calls  for  the  amount  of 

bearing         bonded  and  other  interest-bearing  indebtedness  outstand- 

Indebted-  . 

ness  ing  at  the  close  of  the  year,  exclusive  of  indebtedness 

wholly  secured  by  collateral,  the  subject  of  sale  or  hypo- 
thecation  in  the   ordinary  business  of  the  corporation. 

Item  2,  in  the  supplementary  statement,  calls  for  de- 
tails by  classification,  rate  of  interest  and  amount  of 
principal  of  all  interest  bearing  indebtedness.  It  in- 
cludes all  the  items  of  item  2  in  the  body  of  the  report, 
and  in  addition  thereto,  the  total  amount  owing,  etc., 
on  debts,  wholly  secured  by  collateral,  the  subject  of  sale 
in  the  ordinary  business  of  the  corporation. 

Merchandise  it  wiH  be  noted  that  no  provision  has  been  made  for 
a  merchandise  account;  instead,  separate  accounts  have 
been  recommended,  consisting  of  Sales,  Purchases,  Re- 
turn Sales  and  Inventory.  Return  purchases,  ordin- 
arily, may  be  credited  to  Purchase  Account.  A  Mer- 
chandise Account  has  no  place  in  a  modern  set  of  books. 

Profit  and  No  postings  should  be  made  to  the  Profit  and  Loss 

Loss  Account  Account  during  the  interim  of  a  fiscal  period,  that  is  to 
say,  until  the  books  are  closed  at  the  end  of  the  year. 

The  practice  of  charging  or  crediting  expenses  or 
losses  and  income,  respectively,  direct  to  Profit  and  Loss 
Account,  makes  it  necessary  to  analyze  the  account  in 
order  to  allocate  the  items  contained  therein  for  pur- 
poses of  the  tax  return.  But  apart  from  this  disad- 
vantage and  as  a  matter  of  good  accounting,  Profit  and 
Loss  Account  should  contain  no  entries  until  the  close 
of  the  fiscal  period.  In  the  meantime  all  items  of  in- 
come and  expense  should  be  credited  or  charged  to  ac- 
counts that  by  their  titles  are  descriptive  of  their  con- 
tents. 

After  the  books  have  been  closed  the  balance  of  Profit 
and  Loss  Account  should  be  transferred  either  to  Sur- 
plus or  Impairment  of  Capital  Account,  as  the  case 
may  be. 


no 


INCOME   TAX — LAW  AND   ACCOUNTING 


Dividends 
Declared 


Reconcilia- 
tion of 
Return  with 
Books  of 
Account 


Manufac- 
turing Cor- 
porations 
Operating 
Cost- 
System 


Dividends  declared  should  be  charged  to  Surplus  Ac- 
count and  credited  to  Dividend  Account  against  which 
the  payments  of  dividends  should  be  charged. 

For  the  purpose  of  future  reference,  the  net  income 
as  shown  by  the  return  of  net  income  should  be  recon- 
ciled with  the  result  shown  by  Profit  and  Loss  Account. 
The  difference,  where  the  return  is  made  for  the  fiscal 
year  of  the  corporation,  will  consist  of  such  items  of 
income  as  are  not  taxable,  readjustment  of  book  values 
to  express  appraisal  valuations  or  expenses  or  losses  not 
by  law  deductible. 

Items  are  not  deductible  unless  they  are  charged  off 
in  the  books  of  account  within  the  year  covered  by  the 
return. 

"  A  manufacturing  corporation  may  include  as  an 
element  of  the  cost  of  manufactured  products,  the  cost 
of  raw  material,  the  cost  of  labor  of  the  men  who  actu- 
ally work  on  such  products,  as  well  as  the  cost  of  super- 
visory, or  what  may  be  designated  as  '  unproductive 
labor,'  such  as  that  of  the  foremen,  inspectors,  over- 
seers, etc.,  provided  ,such  expenditures  are  not  separately 
deducted  from  gross  income  in  the  Return  of  Annual 
Net  Income. 

"  The  overhead  charges  referred  to  in  Form  1031 
should  include  the  salaries  of  officers,  clerk  hire,  and 
such  other  office  expenses  as  do  not  have  to  do  directly 
with  the  manufacture  of  the  product."  (T.  D.,  2152.) 

This  ruling  under  the  old  law,  and  provisions  with 
respect  to  account  keeping  of  the  amended  law,  makes 
it  possible  for  manufacturing  corporations  employing 
cost-systems,  that  are  embraced  in  the  general  books  of 
account  and  subject  to  proof  as  to  accuracy,  to  make 
their  returns  on  the  basis  of  cost  of  production,  as 
shown  thereby.  The  form  of  the  return  (1031),  how- 
ever, is  not  well  adapted  to  that  kind  of  report.  For 
example,  it  calls  for  items  under  "  Deductions "  that 


BOOKKEEPING   SUGGESTIONS  111 

ordinarily  (according  to  opinion  of  the  cost  accountant) 
are  charged  to  the  cost  of  production,  as  rent,  fuel, 
light  and  power,  repairs,  payments  in  lieu  of  rent,  de- 
preciation, depletion  and  taxes.  Any  of  these  items  that 
are  included  in  the  cost  of  production  through  the  cost- 
system,  should  not  again  be  stated  as  deductions. 

Items  that  have  been  included  in  the  cost  of  produc- 
tion that  are  separately  provided  for  in  the  report  or 
supplementary  statement  thereof,  should  be  explained  by 
a  notation  "  included  in  cost  of  manufacture."  The  de- 
tailed information  as  to  basis  of  computing  depreciation 
and  depletion,  and  amount  of  domestic  and  foreign  taxes 
charged  to  the  period,  should  be  furnished  in  the  sup- 
plementary statement  even  though  these  items,  or  either 
of  them,  were  included  in  the  cost  of  manufactured 
goods. 

Where  interest  on  capital  is  theoretically  added  to  the 
cost  of  production,  such  interest,  for  income  tax  pur- 
poses, must  either  be  deducted  from  the  cost  of  pro- 
duction or  separately  stated  as  income  in  the  return. 

It  is  quite  usual  to  maintain,  in  connection  with  a 
modern  cost-system,  a  "  perpetual  "  or  "  running "  in- 
ventory. Irrespective  of  the  degree  of  care  with  which 
such  inventory  may  be  operated,  more  or  less  differences 
occur  in  the  course  of  time.  This  necessitates  the  taking 
of  physical  inventories  and  the  adjustment  of  the  "  run- 
ning "  inventory  therewith.  Physical  inventories  should 
be  taken  and  the  book  inventory  reconciled  therewith  at 
least  once  in  each  fiscal  period. 


112 


CHAPTER  VI 

INFORMATION   REQUIRED  TO   PREPARE   RE- 
TURN OF  NET  INCOME  OF  MERCANTILE 
CORPORATION 

The  following  is  a  list  of  all  items  required  in  order  to 
prepare  a  return  of  net  income  of  a  mercantile  corpora- 
tion, showing  where  each  item  should  be  entered  in  the 
return  proper,  and  in  the  supplementary  statement 
thereof. 

Where  the  books  of  account  are  kept  upon  the  "  ac- 
crual basis,"  the  amount  accrued  or  deferred  may  be 
included  in  the  return  but  no  accrued  expense  so  deducted 
shall  exceed: 

1.  The  amount  due  and  payable  within  the  year,  or 

2.  An  amount  actually  accrued  or  incurred  for  which 

the  business  received  value  within  the  year. 

Supple- 
mentary 
Item.  Return.     Statement. 

1.  Total  capital  stock  issued  and  out- 

standing at  close  of  year.  In 
case  of  partly  paid  stock,  then 
the  amount  of  instalments  paid 
in  at  the  close  of  year 1 

2.  Common  stock,  paid-up,  at  close 

of  year 1 

3.  Preferred  stock,  paid-up,  at  close 

of  year 1 

4.  If  the  stock  has  no  par  value,  then 

the  amount  of  capital  employed 
in  the  business  at  the  close  of 
the  year,  exclusive  of  liabilities 
and  borrowed  capital 1  1 


MERCANTILE   CORPORATION  113 


Supple- 
mentary 
Item.  Return.     Statement. 

5.  Total  amount  of  interest-bearing 

indebtedness  at  close  of  year, 
exclusive  of  indebtedness 
wholly  secured  by  collateral,  the 
subject  of  sale  in  ordinary  busi- 
ness of  the  corporation 2 

6.  Character  of  obligation,  rate  of  in- 

terest and  amount  of  principal 
at  close  of  year  of  all  interest- 
bearing  indebtedness,  for  the 
payment  o'f  which  the  corpora- 
tion or  its  property  is  bound, 
including  that  wholly  secured 
by  collateral 2 

7.  Stock  on  hand  at  close  of  year. 

(At  cost)   3  (a) 

8.  Stock  on  hand  at  beginning  of 

year.     (At  cost)    3  (a) 

INCOME. 

9.  Sales    of    Merchandise,    less    dis- 

counts allowed,  allowances  on 

goods  sold  and  return  sales. . .  3  (a) 

10.  Rentals  received,  including  royal- 

ties, if  any 3  (b) 

11.  Interest  received  on  government 

bonds,  or  any  other  Govern- 
ment obligation,  including 
municipal,  state  and  Federal 
(not  taxable)  3  (c) 

12.  All  interest  received,  other  than 

that  on  Government  securities.     3  (c) 


114  INCOME   TAX — LAW  AND   ACCOUNTING 


Supple- 
mentary 
Item.  Return.     Statement. 

13.  Dividends   received  out  of   earn- 

ings of  corporations  and  limited 
partnerships,  accrued  since 
March  1st,  1913 3  (d) 

14.  Income   received    from   all   other 

sources.     (Itemized) 3  (e)       3  (e) 

DEDUCTIONS. 

15.  Purchases,     plus      transportation 

charges  thereon,  less  return 
purchases,  discounts  and  "  anti- 
cipations "  received 3(a) 

16.  All  labor,  wages  and  commissions 

(not  including  salaries  of  offi- 
cers)    4  (a)  4  (a)  1 

17.  Fuel,  light,  power,  etc 4  (a)       4  (a)  2 

18.  Rentals  paid  during  the  year 4  (a)       4  (a)  3 

19.  Repairs,  ordinary  and  incidental. 

( Not   including   improvements 

and  betterments) 4  (a)       4  (a)  4 

20.  Total  of  salaries  paid  to  officers. .     4  (a)       4  (a)  6 

21.  Bad  debts  (uncollectible  accounts) 

actually  ascertained  to  be  un- 
collectible and  charged  off  in 
the  books  of  account  within 
the  year  5  (a)  5  (a) 

22.  Losses  on  capital  assets  computed 

on  basis  outlined  on  page  22..     5(a)       5(a) 

23.  All  other  losses  not  recovered  by 

insurance  or  otherwise 5  (a)       5  (a) 


MERCANTILE   CORPORATION  115 


Supple- 
mentary 
Item.  Return.     Statement. 

24.  Depreciation   charged   off   on   all 

depreciated  properties,  and  the 
following  data  as  to  each  class 
of  property: 

(a)  Kind  of  property 5  (b) 

(b)  Its  cost 5  (b) 

(c)  Probable   life  after  ac- 

quirement    5  (b) 

(d)  Amount     charged     for 

year  covered  by  return     5  (b)       5  (b) 

(e)  Total    amount    charged 

off  thereon  in  previous 

years  5  (b) 

NOTE.— -In  case  of  buildings,  state  kind  of 
construction — as  frame,  brick,  concrete,  etc. 

25.  Interest    paid    during    the    year 

classified  as  follows : 

a.  Interest    paid    on    indebtedness 
wholly  secured  by  collateral,  the  sub- 
ject of  sale  or  hypothecation  in  ordi- 
nary   business    of    the    corporation. 
(This  item  is  deducted  as  a  general 

expense)    4  (a)       4  (a)  5 

b.  Interest  paid  on  mortgages   se- 
cured by  property  which  the  corpora- 
tion occupies  but  does  not  own.     (To 
be  included  in  item  "  Payments  in  lieu 

of  rent  ")  4  (b) 

c.  All  other  interest  paid,  including 
that  on  bonds,  borrowed  capital,  bank 

loans  and  accounts  bearing  interest. .     6  (a) 

NOTE.— The  amount  on  which  interest  is 
deductible    shall    not    exceed    the    paid-up 


116  INCOME   TAX — LAW   AND   ACCOUNTING 


Supple- 
mentary 
Item.  Return.     Statement. 

capital  stock  outstanding  at  the  close  of 
the  year,  or  if  no  capital  stock  the  amount 
of  capital  employed  in  the  business,  plus 
one-half  of  the  interest-bearing  indebted- 
ness then  outstanding. 

26.  Also  the  following  data  with  re- 

spect to  interest  paid : 

(a)  Name  or  kind  of  obliga- 

tion. (Bonds  payable, 
bills  payable,  accounts 
payable,  loans  payable, 
etc.)  6  (a) 

(b)  Amount  of  principal. . .  6  (a) 

(c)  Rate  of  interest 6  (a) 

(d)  Amount  of  interest  paid.  6  (a) 

NOTE. — The  above  detailed  information 
should  be  given  as  to  each  class  of  inter- 
est-bearing indebtedness. 

27.  Taxes    paid    or   accrued    on    the 

books  of  account  not  in  excess 
of  the  amount  due  and  payable 
within  the  year: 

Domestic,  Federal,  State,  etc. 
(Not  including  local  bene- 
fits)    7  (a)  7  (a) 

Foreign  (of  domestic  cor- 
porations only)  7  (b)  7  (b) 

28.  All  other  expenditures  or  expenses 

not  separately  called  for  above, 
such  as:  Freight  on  Sales,  Ad- 
vertising, Traveling  Expense, 
Insurance,  Postage,  Stationery, 
Telephone  and  Telegraph, 


MERCANTILE   CORPORATION  117 


Supple- 
mentary 
Item.  Return.     Statement. 

Legal  Expense,  General  Office 
Expense,  etc.,  classified  into 
five  groups.  (See  page  101) ..  4  (a)  4  (a)  7 

29.  Miscellaneous  information  as  fol- 

lows :  Names  and  addresses  of 
officers  and  employees  receiving 
$3,000  or  more  in  the  year  and 
the  amount  thereof 4  (a)  8 

30.  Detailed    information    as    to    the 

sales  of  capital  assets,  including 

original  cost  of  such  assets,  if 

acquired  since  March  1st,  1913 ; 

fair  market  value  as  of  March 

1st,  1913,  if  acquired  prior  to 

that    date ;    how    such    "  fair 

market  value  "  was  ascertained ; 

selling  price,  and  the  resulting 

profit  or  loss,  as  the  case  may 

be: 

Profits 3(e)       3  (a) 

Losses 5  (a)       5  (a) 

31.  If  the  return  is  not  made  on  the 

basis  of  actual  receipts  and  dis- 
bursements, then  state  how  the 

income  was  computed 7  (b) 

The  difference  between  items 
designated  3  (a)  in  the  order 
stated  in  the  supplementary 
statement,  being  the  "  Gross 
Income  from  Operations " 
should  be  entered  in  the  return 
in  item  3  (a) 


118  INCOME  TAX — LAW  AND  ACCOUNTING 


Supple- 
mentary 
Item.  Return.     Statement. 

Where  the  same  designation  ap- 
pears more  than  one  time 
under  "  Returns  "  the  aggre- 
gate amount  of  all  such  items 
should  be  entered  in  the  report 
proper.  Items  called  for  by 
the  "  supplementary  statement  " 
should  be  separately  entered. 


119 


CHAPTER  VII 

PREPARATION  OF  INCOME  TAX  RETURNS  OF 
INDIVIDUALS 

Method  of          The  privilege  afforded  by  the  income  tax  law  to  cor- 

Bookkeepmg  pOratiOns  with  respect  to  the  preparation  of  income  tax 

returns  upon  a  basis  other  than  that  of  actual  receipts 

and  disbursements  is  also  extended  to  individuals,  in  the 

following  language: 

"  An  individual  keeping  accounts  upon  any  basis  other 
than  that  of  actual  receipts  and  disbursements,  unless 
such  other  basis  does  not  clearly  reflect  his  income,  may, 
subject  to  regulations  made  by  the  Commissioner  of  In- 
ternal Revenue,  with  the  approval  of  the  Secretary  of 
the  Treasury,  make  his  return  upon  the  basis  upon  which 
his  accounts  are  kept,  in  which  case  the  tax  shall  be  com- 
puted upon  his  income  as  so  returned." 

The  "  accrual  method,"  if  it  may  be  so  called,  is  ex- 
plained on  page  88. 


Separation 


Source 


Columns  "A"  and  "B"  of  the  income  tax  return 
should,  respectively,  contain  income  on  which  the  normal 
tax  has  been  withheld  at  the  source  of  payment  and  in- 
come on  which  the  normal  tax  has  not  been  withheld. 
In  column  "  A  "  should  be  entered  the  gross  amount  of 
income  on  which  the  tax  has  been  withheld,  i.  e.,  inclu- 
sive of  the  amount  of  tax  deducted  by  the  withholder. 
For  example,  in  the  case  of  a  salary  of  $10,000,  less  the 
personal  exemption  of  $4,000,  the  tax  withheld  for  the 
year  1916  would  be  1  per  cent,  (after  January  1,  1917,  2 
per  cent.)  of  $6,000,  namely,  $60,  and  the  recipient  of 
such  salary  would  receive  during  the  year  $9,940.  But 
the  amounts  to  be  entered  in  the  return  are:  $6,000  in 
column  "  A  "  and  $4,000  in  column  "  B." 


120  INCOME   TAX — LAW  AND   ACCOUNTING 

INCOME. 

Separate  or        Husband  and  wife  may  render  separate  returns  or 
Returnsof      either  of  them  may  make  the  return  and  include  the  in- 
Husband  and  COme  and  deductions  of  the  other  as  provided  by  the 
form  of  the  return.     If  separate  returns  are  made  by 
husband  and  wife,  each  of  them  shall  only  deduct,  re- 
spectively, his  and  her  own  expenses  and  deductions. 
In  any  case  the  aggregate  personal  exemption  deducted 
by  both  husband  and  wife,  shall  not  exceed  $4,000. 

Return  of  Individuals  engaged  in  mercantile  or  manufacturing 

Merchant  business  on  their  own  account,  and  unincorporated,  are 
not  called  upon  to  state  in  their  returns  the  same  amount 
of  detail  that  is  required  of  corporations.  The  gross 
profit  from  operation  of  a  business  will  be  entered  in  item 
16  under  "  Gross  Income  "  on  page  2  of  the  return.  The 
following  illustrates  method  of  computing  gross  profit : 

Net  Sales  for  the  year $50,000  00 

Stock  on  Hand  (beginning  of  year)       $7,500  00 
Add  Purchases  during  the  year....       35,000  00 


Total    $42,500  00 

Deduct  Stock  on  Hand  (end  of  year)          6,500  00 


Cost  of  Goods  Sold 


36,000  00 


Interest 
Received 


Gross  Profit  for  the  Year  (Entered  in  Item  16).     $14,000  00 

All  expenses  of  the  business,  other  than  interest, 
taxes,  losses  arising  from  fires,  storms,  or  other  casualties 
and  from  theft,  not  compensated  for  by  insurance,  bad 
debts  and  depreciation,  will  be  entered  in  item  32  on  page 
3  under  "  General  Deductions." 

As  to  what  comprises  "  Net  Sales  "  and  "  Purchases," 
see  pages  89  and  90,  respectively. 

All  interest  received  by  an  individual,  excepting  that 
on  bonds  or  other  obligations  of  the  Government  (tax 
exempt)  is  returnable  for  income  tax  purposes  and 


RETURNS   OF  INDIVIDUALS  121 

should  be  separated  into  the  three  classes  prescribed  by 
the  return  and  entered  in  the  respective  items,  as  follows : 

Interest  on  promissory  notes  of  individuals  and  corporations, 
mortgages  of  individuals,  bank  deposits,  loans,  and  from 
other  sources  not  included  in  the  following  classifica- 
tions, to  be  entered  in  item  18  under  "Gross  Income." 

Interest  upon  obligations  of  domestic  corporations,  joint- 
stock  companies  or  associations  and  insurance  com- 
panies, including  bonds,  mortgages,  deeds  of  trust,  or 
other  similar  instruments,  to  be  entered  in  item  19 
under  "  Gross  Income." 

Interest  upon  obligations  of  foreign  corporations  engaged  in 
business  in  foreign  countries,  such  as  bonds,  mortgages, 
deeds  of  trust  or  other  similar  obligations,  issued  in 
foreign  countries ;  also,  dividends  received  upon  the  stock 
of  such  foreign  corporations,  to  be  entered  in  item  22 
under  "Gross  Income." 

Salaries,  Under  the  present  income  tax  law  it  is  not  required 

C^missions  ^iat  an  ^dividual  sna^  report  income  from  any  source 
until  the  same  is  actually  received.  A  promissory  note, 
for  income  tax  purposes,  has  been  ruled  to  be  payment 
and  should  be  treated  as  a  cash  receipt.  Upon  default 
of  payment  thereof  such  note  may  be  deducted  when  it 
has  been  ascertained  to  be  worthless. 

Income  received  in  property,  i.  e.,  the  equivalent  of 
cash,  should  be  reported  at  the  cash  value  thereof. 

Salaries,  wages  and  commissions  from  all  sources 
should  be  entered  in  item  14  under  "  Gross  Income." 

All  commissions  and  other  compensation  received  by 
persons  acting  in  a  fiduciary  capacity,  should  be  reported 
in  this  item.  In  cases  where  the  administration  of  an 
estate  covers  a  period  of  years,  it  is  suggested  that  the 
compensation  of  the  trustee  be  computed  and  reported, 
whether  paid  or  not,  for  each  year,  because  it  has  been 
ruled  that  where  such  compensation  covering  a  period  of 
years  is  paid  in  one  sum,  such  compensation  cannot  be 
prorated  over  the  period  of  years  covered  thereby. 


122  INCOME   TAX  —  LAW  AND   ACCOUNTING 


andfVocatfons  T^e  remar^s  stated  above  with  respect  to  requirements 
of  reporting  income  from  salaries,  wages  and  commis- 
sions, only  when  actually  received,  is  also  true  of  income 
from  professions  and  vocations.  A  lawyer  or  doctor, 
for  example,  is  not  required  to  report  income  until  actual 
payment  of  a  fee  has  been  received. 

All  income   from  professional  or  vocational  sources 
should  be  entered  in  item  15  under  "  Gross  Income." 

Business  In  addition  to  gross  income  from  mercantile  and  man- 

Commerce  u  factoring  pursuits,  there  should  be  included  in  item  16, 
under  "  Gross  Income  "  all  profits  from  the  sale  of  real 
and  personal  property,  including  that  derived  from 
sources  "  not  in  trade,"  such  as,  profits  on  speculations. 
For  method  of  determining  profit  on  sales  of  properties 
purchased  or  acquired  by  the  taxpayer  prior  to  March  1, 
1913,  see  page  23. 

Rents  Rentals  are  not  required  to  be  reported  until  actually 

received  by  cash  or  the  equivalent.  The  total  of  income 
from  this  source  should  be  entered  in  item  17  under 
"  Gross  Income." 

Income  from  All  income  received  from  guardians,  trustees,  execu- 
cianes  tors,  administrators,  receivers  and  conservators,  or  other 
persons  acting  in  a  fiduciary  capacity,  should  be  included 
in  item  20  under  "  Gross  Income."  Dividends  received 
from  domestic  corporations,  through  fiduciaries,  how- 
ever, which  are  not  subject  to  the  normal  tax,  should  be 
entered  in  item  29. 

Partnership  The  share  of  profit  and  gains  of  partners  in  a  part- 
nership, whether  distributed  or  not,  should  be  reported 
in  item  21,  under  "  Gross  Income,"  exclusive  of  dividends 
from  domestic  corporations  which  are  returnable  on  line 
28,  "  Dividends  received  through  partnership." 

Inasmuch  as  income  of  partnerships  is  not  subject  to 
withholding  at  the  source  the  entire  share  in  partnership 


RETURNS   OF  INDIVIDUALS  123 

profits  credited  to  the  partner  should  be  reported  in  col- 
umn "  B." 

In  cases  where  the  partners  by  provision  of  partnership 
articles  are  allowed  a  drawing  account  in  the  form  of 
salary,  charged  in  the  books  of  the  partnership  as  an  ex- 
pense of  the  business,  such  salary  compensation  should 
be  reported  in  item  14  of  the  return  under  "  Gross  In- 
come "  and  the  normal  tax  should  be  withheld  thereon 
and  paid  by  the  partnership  on  amounts  in  excess  of 
personal  exemption. 

Where  the  partners  draw  moneys  on  account  of  accru- 
ing profits,  such  withdrawals,  being  included  in  the  part- 
nership profits  (distributed  and  undistributed)  should 
not  again  be  included  in  the  return  of  net  income. 

Royalties  All  income  received  in  the   form   of   royalties    from 

mines,  oil  wells,  patents,  franchises  or  other  legalized 
privileges  should  be  reported  in  item  23, under  "Gross 
Income." 

Income  from       All  income  not  separately  provided  for  in  the  return 
lources          should  be  entered  in  item  24  and  the  source  of  each 

noted  therein.     It  is  not  necessary  to  particularize  the 

source  except  by  general  classification. 

Dividends  Dividends  on  stock  of  domestic  corporations,   which 

Received 

are  subject  to  the  normal  tax  on  their  income,  should  be 
reported  on  line  27  under  "  Gross  Income."  There 
should  be  included  in  this  item  all  distributions  of  net 
earnings  of  such  corporations,  whether  or  not  there  was 
a  formal  declaration  of  dividends  by  the  board  of  direc- 
tors ;  for  example,  distribution  of  earnings  by  "  close  cor- 
porations "  that  do  not  observe  technical  requirements 
of  corporation  law  with  respect  to  the  declaration  of  divi- 
dends by  board  of  directors,  but  distribute  profits  in- 
formally as  they  accrue,  should  be  included  therein. 


124  INCOME  TAX — LAW  AND  ACCOUNTING 

DEDUCTIONS. 

Necessary  Unless  the  "'  accrual  method  "  of  account  keeping  is 

Expenses  employed  by  the  taxpayer,  the  amount  deducted  in  item 
32  under  "  General  Deductions  "  should  be  only  the  total 
of  expenses  actually  paid  within  the  year.  There  shall 
not  be  included  therein  any  personal,  living  or  family 
expenses.  In  the  case  of  a  merchant  this  item  will  in- 
clude the  administration  and  selling  expenses  of  his  busi- 
ness but  not  the  cost  of  merchandise  purchases,  which  are 
deductible  from  sales  in  the  ascertainment  of  gross  profit 
entered  in  item  16  under  "  Gross  Income." 

No  partnership  expenses  are  deductible  in  the  return 
of  an  individual. 

In  the  case  of  rented  property,  amounts  expended  for 
maintenance  and  repairs  are  deductible  in  this  item,  but 
amounts  expended  for  permanent  improvements  or  better- 
ments are  not  competent  deductions. 

Interest  Paid  All  interest  paid  within  the  year  by  the  taxpayer  on 
his  indebtedness  is  deductible  in  item  33  under  "  General 
Deductions."  There  is  no  limitation  as  to  the  amount 
of  interest  deductible  by  an  individual  taxpayer,  such  as 
there  is  in  the  case  of  a  corporation  except,  in  the  case  of 
nonresident  alien  individuals,  see  page  30. 

Taxes  Paid  All  national,  foreign,  State,  county,  school  and  munic- 
ipal taxes  paid  within  the  year,  not  including  assessments 
for  local  benefits,  such  as  sewerage,  sidewalk,  street  im- 
provements, etc.,  are  deductible  in  item  34  under  "  Gen- 
eral Deductions."  Taxes  paid  on  the  residence  of  the 
taxpayer  are  deductible. 

Losses  All  losses  sustained  during  the  year  incurred  in  business 

or  trade,  or  arising  from  fires,  storms,  shipwreck  or  other 
casualties,  and  from  theft,  not  compensated  by  insurance, 
or  otherwise,  are  deductible  in  item  35  under  "  General 
Deductions." 


RETURNS   OF  INDIVIDUALS 


125 


Loss  Not 
In  Trade 


Bad  Debts 


Where  a  loss  is  sustained  in  the  sale  of  property 
acquired  prior  to  March  1,  1913,  the  measure  of  loss  is 
the  difference  between  the  fair  market  price  or  value  as 
at  March  1,  1913,  and  the  amount  realized  from  such 
sale. 

This  item  should  be  supplemented  with  the  following 
information : 

(a)  Of  what  the  loss  consisted. 

(b)  When  it  was  actually  sustained. 

(c)  How  it  was  determined  to  be  a  loss. 

(d)  If  sustained  by  sale  of  property  acquired  before  March 

1,  1913,  the  fair  market  price  or  value  as  of  that  date 
and  how  such  value  was  determined. 

Losses  sustained  during  the  year  in  transactions 
entered  into  for  .profit  but  not  connected  with  the  business 
or  trade  of  the  taxpayer,  should  be  entered  in  item  36 
under  "  General  Deductions."  Such  losses  are  only  de- 
ductible up  to  the  amount  of  profit  or  income  during  the 
year  derived  from  the  same  class  of  transactions,  which 
would  be  included  under  "  Gross  Income  "  in  item  16. 

The  amount  of  profit  or  income  derived  from  such 
transactions  during  the  year  should  be  entered  under 
Item  36  and  the  same  information  called  for  with  respect 
to  losses  incuned  in  trade  in  item  35  should  be  furnished 
with  regard  to  losses  not  in  trade. 

Uncollectible  accounts  actually  ascertained  to  be  worth- 
less, charged  off  on  the  books  of  account  of  the  individual 
within  the  year,  should  be  stated  in  item  37,  supple- 
mented by  the  following  information : 

(a)  Of  what  the  debts  consisted. 

(b)  When  they  were  created. 

(c)  When  they  became  due. 

(d)  How  they  were  actually  determined  to  be  worthless. 

(e)  Whether  or  not  they  have  been  included  in  the  present 

or  previous  return. 

As  to  what  constitutes  worthless  accounts  receivable 
for  purposes  of  the  income  tax  return,  see  page  103. 


126  INCOME  TAX — LAW  AND  ACCOUNTING 

To  render  an  item  deductible  under  this  title  it  must  be 
actually  charged  off  within  the  year. 

Depreciation  A  reasonable  allowance  for  exhaustion,  wear  and  tear 
of  property,  arising  out  of  its  use  or  employment  in  busi- 
ness or  trade,  should  be  deducted  in  item  38  under  "  Gen- 
eral Deductions." 

As  to  deductibility  of  depreciation  on  various  classes 
of  properties,  see  Chapter  IV,  on  Depreciation,  page  68. 
The  following  information  should  be  given  with  respect 
to  each  class  of  property  on  which  such  deduction  is 
made: 

(a)  Kind  of  property  on  which  depreciation  is  taken. 

(b)  Cost  of  same. 

(c)  What  percentage  of  depreciation  is  claimed. 

In  case  of  buildings,  state  when  erected  and  of  what 
materials  constructed. 

Depletion  A  reasonable  allowance  for  depletion  of  oil,  gas  wells 

and  mines  should  be  deducted  in  item  39  under  "  General 
Deductions." 

For  limitation  of  deductibility  of  depletion  on  oil,  gas 
wells  and  mines,  respectively,  see  pages  27  and  28.  In 
the  case  of  property  acquired  prior  to  March  1,  1913,  the 
depletion  allowable  shall  be  at  a  rate,  which,  during  the 
estimated  life  of  the  property  being  depleted  will  return : 

The  cost  of  the  property,  if  acquired  after  March  1,  1913,  or 
The  fair  market  value  as  of  March  1,  1913,  if  acquired  before 
that  date. 

These  items  should  be  supplemented  with  the  following 
information : 

(a)  The  cost  of  property,  if  purchased  after  March  1,  1913. 

(b)  The  fair  market  value  as  of  March  1,  1913,  if  purchased 

prior  to  that  date. 

(c)  How  such  value  was  determined. 

(d)  The  basis  upon  which  the  amount  of  depletion  claimed 

was  computed. 


RETURNS   OF  INDIVIDUALS 


127 


Illustration—  For  the  purpose  of  illustrating  the  method  of  comput- 
Computing  ing  the  normal  and  additional  tax  of  an  individual,  based 
Normal  and  on  requirements  of  the  law  for  the  year  1916  (only  1  per 

cent,  withheld),  the  following  summary  of  income  and 

deductions  is  assumed : 


Additional 
Tax 


Line 
of 
Re- 
turn. 


Description  of  Income. 
(Page  2). 


A. 

Income  on 
Which  Tax 

Has  Been 

Paid  or 
Withheld. 


B. 

Income 
on  Which 
Tax  Has 
Not  Been 

Paid  or 
Withheld. 


25.  Totals   (Note.— Enter  1  per  cent  of 
total    amount    of    Column    A    on 

line   9)     $80,000  00  $250,000  00 

26.  Aggregate    Totals    of    Col- 
umns A   and   B 330,00000 

27.  Dividends  on  stock  of  corporations, 

etc.,  subject  to  like  tax $5,00000 

28.  Dividends  received  through  partner- 

ship.    (See    line    21) 50000 

29.  Dividends    received    through    fiduci- 

aries.    (See    line    20) 1,00000 

30.  Total  Dividends.     (Lines  27,  28  and  29.) 

(Enter   on  line   4) 6,500  00 

31.  Total  Gross  Income  (to  be  entered  on  line 

1)     $336,500  00 

Deductions  (Page  3). 
40.  Total  "  General  Deductions  "  (to  be  entered 

one   line  2) $25,000  00 

Summary  (Page  1). 

1.  Gross  Income  (brought  from  line  31) $336,500  00 

2.  General  Deductions  (brought  from  line  40) 25,000  00 

3.  Net  Income    $311,500  00 

4.  Dividends  brought  from  line  30....        $6,500  00 

5.  Personal  exemption   (single,  $3,000; 

married  or  head  of  family,  $4,000)         4,000  00 

6.  Total  dividends  and  personal  exemption 

(Items  4  and  5) $10,500  00 


128  INCOME   TAX — LAW  AND   ACCOUNTING 


7.  Amount  of  Income  subject  to  normal  tax 301,000  00 

8.  Amount  of  Normal  Tax  at  rate  of  2  per  cent,  on 

income  shown  on  line  7 6,020  00 

9.  Credit  by  amount  of  normal  tax  paid  or  to  be 

paid  at  source   (1  per  cent,  of  amount  of  in- 
come shown  on  line  25,  Column  A) 300  00 


10.  Balance  of  normal  tax  due $5,220  00 


Income.  Tax. 

One  per  cent,  on  amount  over  $20,000 

and  not  exceeding  $40,000 $20,000  00         $200  00 

Two  per  cent,  on  amount  over  $40,000 

and  not  exceeding  $60,000 20,000  00  400  00 

Three  per  cent,  on  amount  over  $60,000 

and  not  exceeding  $80,000 20,000  00  600  00 

Four  per  cent,  on  amount  over  $80,000 

and  not  exceeding  $100,000 20,000  00  800  00 

Five  per  cent,  on  amount  over  $100,000 

and  not  exceeding  $150,000 50,000  00        2,500  00 

Six  per  cent,  on  amount  over  $150,000 

and  not  exceeding  $200,000 50,000  00         3,000  00 

Seven  per  cent,  on  amount  over  $200,000 

and  not  exceeding  $250,000 50,000  00         3,500  00 

Eight  per  cent,  on  amount  over  $250,000 

and  not  exceeding  $300,000 50,000  00         4,000  00 

Nine  per  cent,  on  amount  over  $300,000 

and  not  exceeding  $500,000 11,500  00         1,035  00 

Ten  per  cent,  on  amount  over  $500,000 

and  not   exceeding  $1,000,000 

Eleven     per     cent,     on     amount     over 

$1,000,000  and  not  exceeding  $1,500,000        

Twelve     per     cent,     on     amount     over 

$1,500,000  and  not  exceeding  $2,000,000        

Thirteen    per    cent,    on    amount    over 

$2,000,000    


11.  Total  additional  tax $16,035  00 

12.  Balance  of  normal  tax  due,  as  shown  on 

line  10  .  5,220  00 


13.  Total  Tax  Due $21,255  00 


129 


APPENDIX   A 

FEDERAL  INCOME  TAX  LAW 
ENACTED  SEPTEMBER  8,  1916 

PART  I. — ON  INDIVIDUALS 

SEC.  1.  (a)  That  there  shall  be  levied,  assessed,  collected,  and 
paid  annually  upon  the  entire  net  income  received  in  the 
preceding  calendar  year  from  all  sources  by  every  individual, 
a  citizen  or  resident  of  the  United  States,  a  tax  of  two  per 
centum  upon  such  income ;  and  a  like  tax  shall  be  levied,  assessed, 
collected,  and  paid  annually  upon  the  entire  net  income  received 
in  the  preceding  calendar  year  from  all  sources  within  the 
United  States  by  every  individual,  a  non-resident  alien,  including 
interest  on  bonds,  notes,  or  other  interest-bearing  obligations 
of  residents,  corporate  or  otherwise. 

(b)  In  addition  to  the  income  tax  imposed  by  subdivision 
(a)  of  this  section  (herein  referred  to  as  the  normal  tax) 
there  shall  be  levied,  assessed,  collected,  and  paid  upon  the 
total  net  income  of  every  individual,  or,  in  the  case  of  a  non- 
resident alien,  the  total  net  income  received  from  all  sources 
within  the  United  States,  an  additional  income  tax  (herein 
referred  to  as  the  additional  tax)  of  one  per  centum  per  annum 
upon  the  payment  by  which  such  total  net  income  exceeds 
$20,000  and  does  not  exceed  $40,000,  two  per  centum  per  annum 
upon  the  amount  by  which  such  total  net  income  exceeds 
$40,000  and  does  not  exceed  $60,000,  three  per  centum  per  annum 
upon  the  amount  by  which  such  total  net  income  exceeds 
$60,000  and  does  not  exceed  $80,000,  four  per  centum  per 
annum  upon  the  amount  by  which  such  total  net  income  exceeds 
$80,000  and  does  not  exceed  $100,000,  five  per  centum  per 
annum  upon  the  amount  by  which  such  total  net  income  exceeds 
$100,000  and  does  not  exceed  $150.000,  six  per  centum  per  annum 
upon  the  amount  by  which  such  total  net  income  exceeds 
$150,000  and  does  not  exceed  $200,000,  seven  per  centum  per 
annum  upon  the  amount  by  which  such  total  net  income  exceeds 
$200,000  and  does  not  exceed  $250,000,  eight  per  centum  per 
annum  upon  the  amount  by  which  such  total  net  income  exceeds 
$250,000  and  does  not  exceed  $300,000,  nine  per  centum  per 
annum  upon  the  amount  by  which  such  total  net  income  exceeds 
$300,000  and  does  not  exceed  $500,000  ten  per  centum  per 
annum  upon  the  amount  by  which  such  total  net  income  exceeds 


130 


APPENDIX   A 


Dividends 
Subject  to 
Additional 
Tax 


Calendar 
Year 


$500,000,  and  does  not  exceed  $1,000,000,  eleven  per  centum  per 
annum  upon  the  amount  by  which  such  total  net  income  exceeds 
$1,000,000  and  does  not  exceed  $1,500,000,  twelve  per  centum 
per  annum  upon  the  amount  by  which  such  total  net  income 
exceeds  $1,500,000  and  does  not  exceed  $2,000,000,  and  thirteen 
per  centum  per  annum  upon  the  amount  by  which  such  total  net 
income  exceeds  $2,000,000. 

For  the  purpose  of  the  additional  tax  there  shall  be  included 
as  income  the  income  derived  from  dividends  on  the  capital 
stock  or  from  the  net  earnings  of  any  corporation,  joint-stock 
company  or  association,  or  insurance  company,  except  that  in 
the  case  of  non-resident  aliens  such  income  derived  from  sources 
without  the  United  States  shall  not  be  included. 

All  the  provisions  of  this  title  relating  to  the  normal  tax  on 
individuals,  so  far  as  they  are  applicable  and  are  not  incon- 
sistent with  this  subdivision  and  section  three,  shall  apply 
to  the  imposition,  levy,  assessment,  and  collection  of  the  addi- 
tional tax  imposed  under  this  subdivision. 

(c)  The  foregoing  normal  and  additional  tax  rates  shall 
apply  to  the  entire  net  income,  except  as  hereinafter  provided, 
received  by  every  taxable  person  in  the  calendar  year  nineteen 
hundred  and  sixteen  and  in  each  calendar  year  thereafter. 


Net  Income 
Defined 


"Dividends" 
Distributed 
or  Ordered 
Distributed 


INCOME    DEFINED. 

SEC.  2.  (a)  That,  subject  only  to  such  exemptions  and  deduc- 
tions as  are  hereinafter  allowed,  the  net  income  of  a  taxable 
person  shall  include  gains,  profits,  and  income  derived  from 
salaries,  wages,  or  compensation  for  personal  service  of  what- 
ever kind  and  in  whatever  form  paid,  or  from  professions, 
vocations,  businesses,  trade,  commerce,  or  sales,  or  dealings  in 
property,  whether  real  or  personal,  growing  out  of  the  owner- 
ship or  use  of  or  interest  in  real  or  personal  property,  also 
from  interest,  rent,  dividends,  securities,  or  the  transaction 
of  any  business  carried  on  for  gain  or  profit,  or  gains  or 
profits  and  income  derived  from  any  source  whatever:  Pro- 
vided, That  the  term  "dividends"  as  used  in  this  title  shall  be 
held  to  mean  any  distribution  made  or  ordered  to  be  made 
by  a  corporation,  joint-stock  company,  association,  or  insurance 
company,  out  of  its  earnings  or  profits  accrued  since  March 
first,  nineteen  hundred  and  thirteen,  and  payable  to  its  share- 
holders, whether  in  cash  or  in  stock  of  the  corporation,  joint- 
stock  company,  association,  or  insurance  company,  which  stock 


FEDERAL  INCOME  TAX  LAW  131 

dividend  shall  be  considered  income,  to  the  amount  of  its  cash 
value. 

Income  of  (b)  Income  received  by  estates  of  deceased  persons  during 

Estates  the  period  of  administration  or  settlement  of  the  estate,  shall 

be  subject  to  the  normal  and  additional  tax  and  taxed  to  their 
estates,  and  also  such  income  of  estates  or  any  kind  of  property 
held  in  trust,  including  such  income  accumulated  in  trust  for 
the  benefit  of  unborn  or  unascertained  persons,  or  persons  with 
contingent  interests,  and  income  held  for  future  distribution 
under  the  terms  of  the  will  or  trust  shall  be  likewise  taxed, 
the  tax  in  each  instance,  except  when  the  income  is  returned 
for  the  purpose  of  the  tax  by  the  beneficiary,  to  be  assessed 
to  the  executor,  administrator,  or  trustee,  as  the  case  may  be: 
Individual  Provided,  That  where  the  income  is  to  be  distributed  annually 
ar®  .  .  or  regularly  between  existing  heirs  or  legatees,  or  beneficiaries 
the  rate  of  tax  and  method  of  computing  the  same  shall  be 
based  in  each  case  'upon  the  amount  of  the  individual  share 
to  be  distributed. 

Indemnity  to  Such  trustees,  executors,  administrators,  and  other  fiduciaries 
Fiduciaries  are  hereby  indemnified  against  the  claims  or  demands  of  every 
beneficiary  for  all  payments  of  taxes  which  they  shall  be 
required  to  make  under  the  provisions  of  this  title,  and  they 
shall  have  credit  for  the  amount  of  such  payments  against  the 
beneficiary  or  principal  in  any  accounting  which  they  make 
as  such  trustees  or  other  fiduciaries. 

Basis  of  (c)  For  the  purpose  of  ascertaining  the  gain  derived  from 

Determining    the   sale   or   other   disposition   of    property,   real,   personal,    or 
Gam  on  mixed,    acquired    before    March    first,    nineteen    hundred    and 

Acquired          thirteen,  the  fair  market  price  or  value  of  such  property  as  of 
Prior  to  March  first,  nineteen  hundred  and  thirteen,  shall  be  the  basis 

March  1,1913  for  determining  the  amount  of  such  gain  derived. 

ADDITIONAL   TAX    INCLUDES    UNDISTRIBUTED    PROFITS. 

Undistributed      SEC.  3.  For  the  purpose   of    the   additional   tax,   the   taxable 
Profits  income  of  any  individual  shall  include  the  share  to  which  he 

would  be  entitled  of  the  gains  and  profits,  if  divided  or  dis- 
tributed,  whether  divided  or  distributed  or  not,  of  all  cor- 
porations, joint-stock  companies  or  associations,  or  insurance 
companies,  however  created  or  organized,  formed  or  fraudu- 
lently availed  of  for  the  purpose  of  preventing  the  imposition 
of  such  tax  through  the  medium  of  permitting  such  gains  and 
profits  to  accumulate  instead  of  being  divided  or  distributed; 


132 


APPENDIX    A 


and  the  fact  that  any  such  corporation,  joint-stock  company  or 
association,  or  insurance  company,  is  a  mere  holding  company, 

Accumulation01"    that    the    gains    and    pr°fits    are    Permitted    to    accumulate 
Evidence  of     bey°nd  tne  reasonable  needs   of   the  business,   shall  be  prima 


Fraud 


Tax  Exempt 
Income 

Insurance 


Gifts 
Bequests 

Interest  on 
Obligations 
of  State 


Compensation 
of  Certain 
Employees 
of  State 


Deductions 


facie  evidence  of  a  fraudulent  purpose  to  escape  such  tax;  but 
the  fact  that  the  gains  and  profits  are  in  any  case  permitted 
to  accumulate  and  become  surplus  shall  not  be  construed  as 
evidence  of  a  purpose  to  escape  the  said  tax  in  such  case 
unless  the  Secretary  of  the  Treasury  shall  certify  that  in  his 
opinion  such  accumulation  is  unreasonable  for  the  purposes 
of  the  business.  When  requested  by  the  Commissioner  of 
Internal  Revenue,  or  any  district  collector  of  internal  revenue, 
such  corporation,  joint-stock  company  or  association,  or  insur- 
ance company  shall  forward  to  him  a  correct  statement  of  such 
gains  and  profits  and  the  names  and  addresses  of  the  individuals 
or  shareholders  who  would  be  entitled  to  the  same  if  divided 
or  distributed. 

INCOME   EXEMPT   FROM   LAW. 

SEC.  4.  The  following  income  shall  be  exempt  from  the  pro- 
visions of  this  title: 

The  proceeds  of  life  insurance  policies  paid  to  individual 
beneficiaries  upon  the  death  of  the  insured;  the  amount  received 
by  the  insured,  as  a  return  of  premium  or  premiums  paid  by 
him  under  life  insurance,  endowment,  or  annuity  contracts, 
either  during  the  term  or  at  the  maturity  of  the  term  men- 
tioned in  the  contract  or  upon  the  surrender  of  the  contract; 
the  value  of  property  acquired  by  gift,  bequest,  devise,  or 
descent  (but  the  income  from  such  property  shall  be  included 
as  income) ;  interest  upon  the  obligations  of  a  State  or  any 
political  subdivision  thereof  or  upon  the  obligations  of  the 
United  States  or  its  possessions  or  securities  issued  under  the 
provisions  of  the  Federal  farm  loan  Act  of  July  seventeenth, 
nineteen  hundred  and  sixteen ;  the  compensation  of  the  present 
President  of  the  United  States  during  the  term  for  which  he 
has  been  elected,  and  the  judges  of  the  Supreme  and  inferior 
courts  of  the  United  States  now  in  office,  and  the  compensation 
of  all  officers  and  employees  of  a  State,  or  any  political  sub- 
division thereof,  except  when  such  compensation  is  paid  by 
the  United  States  Government. 

DEDUCTIONS   ALLOWED. 

SEC.  5.  That  in  computing  net  income  in  the  case  of  a  citi- 
zen or  resident  of  the  United  States — 

(a)  For  the  purpose  of  the  tax  there  shall  be  allowed  as  de- 
ductions— 


FEDERAL   INCOME   TAX   LAW 


133 


Necessary 
Expenses 


Interest 
Taxes 


First  The  necessary  expenses  actually  paid  in  carrying  on 
any  business  or  trade,  not  including  personal,  living,  or  family 
expenses ; 

Second.    All  interest  paid  within  the  year  on  his  indebtedness ; 

Third.  Taxes  paid  within  the  year  imposed  by  the  authority 
of  the  United  States  or  its  Territories,  or  possessions,  or  any 
foreign  country,  or  under  the  authority  of  any  State,  county, 
school  district,  or  municipality,  or  other  taxing  subdivision  of 
any  State,  not  including  those  assessed  against  local  benefits; 

Fourth.  Losses  actually  sustained  during  the  year,  incurred  in 
his  business  or  trade,  or  arising  from  fires,  storms,  shipwreck, 
or  other  casualty,  and  from  theft,  when  such  losses  are  not 
compensated  for  by  insurance  or  otherwise:  Provided,  That  for 
the  purpose  of  ascertaining  the  loss  sustained  from  the  sale 
or  other  disposition  of  property,  real,  personal,  or  mixed,  ac- 
quired before  March  first,  nineteen  hundred  and  thirteen,  the 
fair  market  price  or  value  of  such  property  as  of  March  first, 
nineteen  hundred  and  thirteen,  shall  be  the  basis  for  determin- 
ing the  amount  of  such  loss  sustained; 

Fifth.  In  transactions  entered  into  for  profit  but  not  con- 
nected with  his  business  or  trade,  the  losses  actually  sustained 
therein  during  the  year  to  an  amount  not  exceeding  the  profits 
arising  therefrom; 

Sixth.  Debts  due  to  the  taxpayer  actually  ascertained  to  be 
worthless  and  charged  off  within  the  year; 

Depreciation  Seventh.  A  reasonable  allowance  for  the  exhaustion,  wear 
and  tear  of  property  arising  out  of  its  use  or  employment  in 
the  business  or  trade; 

Depletion  Eighth,     (a)   In  the  case  of  oil  and  gas  wells  a  reasonable 

allowance  for  actual  reduction  in  flow  and  production  to  be 
ascertained  not  by  the  flush  flow,  but  by  the  settled  production 
or  regular  flow;  (b)  in  the  case  of  mines  a  reasonable  allow- 
ance for  depletion  thereof  not  to  exceed  the  market  value  in  the 
mine  of  the  product  thereof,  which  has  been  mined  and  sold  dur- 
ing the  year  for  which  the  return  and  computation  are  made, 
such  reasonable  allowance  to  be  made  in  the  case  of  both  (a) 
and  (b)  under  rules  and  regulations  to  be  prescribed  by  the 
Limitation  of  Secretary  of  the  Treasury:  Provided,  That  when  the  allow- 
Depletion  ances  authorized  in  (a)  and  (b)  shall  equal  the  capital  origi- 
nally invested,  or  in  case  of  purchase  made  prior  to  March  first, 


Losses  in 
Trade 


Loss  on 
Property 
Acquired 
Prior  to 
March  1, 
1913 


Losses  not 
in  Trade 


Bad  Debts 


134 


APPENDIX   A 


not 
Deductible 


nineteen  hundred  and  thirteen,  the  fair  market  value  as  of  that 
Improvements  date,  no  further  allowance  shall  be  made.  No  deduction  shall 
be  allowed  for  any  amount  paid  out  for  new  buildings,  perma- 
nent improvements,  or  betterments,  made  to  increase  the  value 
of  any  property  or  estate,  and  no  deduction  shall  be  made  for 
any  amount  of  expense  of  restoring  property  or  making  good 
the  exhaustion  thereof  for  which  an  allowance  is  or  has  been 
made. 


Normal  Tax 
Credits 


Dividends 


Deductions 

Nonresident 

Aliens 


Necessary 
Expenses 


Proportion 
of  Interest 


Taxes 


CREDITS  ALLOWED. 

(b)  For   the    purpose   of    the   normal    tax    only,    the   income 
embraced  in  a  personal  return  shall  be  credited  with  the  amount 
received  as  dividends  upon  the  stock  or  from  the  net  earnings 
of  any  corporation,  joint-stock  company  or  association,  trustee, 
or  insurance  company,  which  is  taxable  upon  its  net  income  as 
hereinafter  provided; 

(c)  A  like  credit  shall  be  allowed  as  to  the  amount  of  in- 
come, the  normal  tax  upon  which  has  been  paid  or  withheld 
for  payment  at  the  source  of  the  income  under  the  provisions 
of  this  title. 

NONRESIDENT  ALIENS. 

SEC.  6.  That  in  computing  net  income  in  the  case  of  a  non- 
resident alien — 

(a)  For  the  purpose  of  the  tax  there  shall  be  allowed  as 
deductions — 

First.  The  necessary  expenses  actually  paid  in  carrying  on 
any  business  or  trade  conducted  by  him  within  the  United 
States,  not  including  personal,  living,  or  family  expenses; 

Second.  The  proportion  of  all  interest  paid  within  the  year 
by  such  person  on  his  indebtedness  which  the  gross  amount 
of  his  income  for  the  year  derived  from  sources  within  the 
United  States  bears  to  the  gross  amount  of  his  income  for  the 
year  derived  from  all  sources  within  and  without  the  United 
States,  but  this  deduction  shall  be  allowed  only  if  such  person 
includes  in  the  return  required  by  section  eight  all  the  informa- 
tion necessary  for  its  calculation; 

Third.  Taxes  paid  within  the  year  imposed  by  the  authority 
of  the  United  States,  or  its  Territories,  or  possessions,  or  under 
the  authority  of  any  State,  county,  school  district,  or  muni- 
cipality, or  other  taxing  subdivision  of  any  State,  paid  within 
the  United  States,  not  including  those  assessed  against  local 
benefits ; 


FEDERAL   INCOME   TAX   LAW 


135 


Losses  Fourth.    Losses  actually  sustained  during  the  year,  incurred 

in  business  or  trade  conducted  by  him  within  the  United  States, 
and  losses  of  property  within  the  United  States  arising  from 
fires,  storm,  shipwreck,  or  other  casualty,  and  from  theft,  when 
such  losses  are  not  compensated  for  by  insurance  or  otherwise: 
Ascertaining  Provided,  That  for  the  purpose  of  ascertaining  the  amount  of 
Amount  of  such  loss  or  losses  sustained  in  trade,  or  speculative  transactions 
not  in  trade,  from  the  same  or  any  kind  of  property  acquired 
before  March  first,  nineteen  hundred  and  thirteen,  the  fair 
market  price  or  value  of  such  property  as  of  March  first,  nine- 
teen hundred  and  thirteen,  shall  be  the  basis  for  determining 
the  amount  of  such  loss  or  losses  sustained: 


Losses  not 
in  Trade 


Bad  Debts 


Fifth.  In  transactions  entered  into  for  profit  but  not  con- 
nected with  his  business  or  trade,  the  losses  actually  sustained 
therein  during  the  year  to  an  amount  not  exceeding  the  profits 
arising  therefrom  in  the  United  States; 

Sixth.  Debts  arising  in  the  course  of  business  or  trade  con- 
ducted by  him  within  the  United  States  due  to  the  taxpayer 
actually  ascertained  to  be  worthless  and  charged  off  within  the 
year; 

Depreciation  Seventh.  A  reasonable  allowance  for  the  exhaustion,  wear 
and  tear  of  property  within  the  United  States  arising  out  of 
its  use  or  employment  in  the  business  or  trade;  (a)  in  the  case 
of  oil  and  gas  wells  a  reasonable  allowance  for  actual  re- 
duction in  flow  and  production  to  be  ascertained  not  by  the 
flush  flow,  but  by  the  settled  production  or  regular  flow;  (b) 
in  the  case  of  mines  a  reasonable  allowance  for  depletion 
thereof  not  to  exceed  the  market  value  in  the  mine  of  the 
product  thereof,  which  has  been  mined  and  sold  during  the 
year  for  which  the  return  and  computation  are  made,  such 
reasonable  allowance  to  be  made  in  the  case  of  both  (a) 
and  (b)  under  rules  and  regulations  to  be  prescribed  by  the 

Limitation  of   Secretary   of   the   Treasury:   Provided,   That   when  the   allow- 

Depletion  ance  authorized  in  (a)  and  (b)  shall  equal  the  capital  origin- 
ally invested,  or  in  case  of  purchase  made  prior  to  March  first, 
nineteen  hundred  and  thirteen,  the  fair  market  value  as  of  that 

Improvements  date,  no  further  allowance  shall  be  made.  No  deduction  shall 
be  allowed  for  any  amount  paid  out  for  new  buildings,  perma- 
nent  improvements,  or  betterments,  made  to  increase  the  value 
of  any  property  or  estate,  and  no  deduction  shall  be  made  for 
any  amount  of  expense  of  restoring  property  or  making  good 
the  exhaustion  thereof  for  which  an  allowance  is  or  has  been 
made. 


Deductible 


136 


APPENDIX   A 


(b)  There  shall  also  be  allowed  the  credits  specified  by  sub- 
divisions (b)  and  (c)  of  section  five. 

PERSONAL   EXEMPTION. 

Individual  SEC.  7.     (a)  That  for  the  purpose  of  the  normal  tax  only, 

Exemption  there  shall  be  allowed  as  an  exemption  in  the  nature  of  a  de- 
duction from  the  amount  of  the  net  income  of  each  of  said 
persons,  ascertained  as  provided  herein,  the  sum  of  $3,000,  plus 
$1,000  additional  if  the  person  making  the  return  be  a  head  of 
a  family  or  a  married  man  with  a  wife  living  with  him,  or 
plus  the  sum  of  $1,000  additional  if  the  person  making  the 
return  be  a  married  woman  with  a  husband  living  with  her; 
but  in  no  event  shall  this  additional  exemption  of  $1,000  be 
deducted  by  both  a  husband  and  a  wife :  Provided,  That  only 
one  deduction  of  $4,000  shall  be  made  from  the  aggregate  in- 
come of  both  husband  and  wife  when  living  together :  Provided 
further,  That  guardians  or  trustees  shall  be  allowed  to  make 
this  personal  exemption  as  to  income  derived  from  the  property 
of  which  such  guardian  or  trustee  has  charge  in  favor  of  each 
ward  or  cestui  que  trust:  Provided  further,  That  in  no  event 
shall  a  ward  or  cestui  que  trust  be  allowed  a  greater  personal 
exemption  than  $3,000,  or,  if  married,  $4,000,  as  provided  in  this 
paragraph,  from  the  amount  of  net  income  received  from  all 
Estates  sources.  There  shall  also  be  allowed  an  exemption  from  the 

amount  of  the  net  income  of  estates  of  deceased  persons  during 
the  period  of  administration  or  settlement,  and  of  trust  or  other 
estates  the  income  of  which  is  not  distributed  annually  or  regu- 
larly under  the  provisions  of  paragraph  (b),  section  two,  the 
sum  of  $3,000,  including  such  deductions  as  are  allowed  under 
section  five. 

Exemption  to      (b)  A  nonresident  alien  individual  may  receive  the  benefit  of 
Nonresident    the   exemption  provided   for   in  this   section   only  by  filing  or 


Ward 
Cestui  que 
Trust 


Alien 
Conditional 


causing  to  be  filed  with  the  collector  of  internal  revenue  a  true 
and  accurate  return  of  his  total  income,  received  from  all 
sources,  corporate  or  otherwise,  in  the  United  States,  in  the 
manner  prescribed  by  this  title ;  and  in  case  of  his  failure  to  file 
such  return  the  collector  shall  collect  the  tax  on  such  income, 
and  all  property  belonging  to  such  nonresident  alien  individual 
shall  be  liable  to  distraint  for  the  tax. 


RETURNS. 


Returns  of          SEC.  8.  (a)  The  tax  shall  be  computed  upon  the  net  income, 

Net  Income     as   thus    ascertained,   of    each   person    subject  thereto,    received 

in  each  preceding  calendar  year   ending  December  thirty-first. 


FEDERAL   INCOME   TAX   LAW 


137 


When  and 
With  Whom 
to  File  Return 


Extension  of 
Time  to  File 
Return 


Return  by 
Agent 


(b)  On  or  before  the  first  day  of  March,  nineteen  hundred 
and  seventeen,  and  the  first  day  of  March  in  each  year  there- 
after, a  true  and  accurate  return  under  oath  shall  be  made  by 
each    person    of    lawful    age,    except    as    hereinafter    provided, 
having  a  net  income  of  $3,000  or  over   for  the  taxable  year 
to  the  collector  of  internal  revenue  for  the  district  in  which 
such  person  has  his  legal  residence  or  principal  place  of  business, 
or  if  there  be  no  legal  residence  or  place  of  business  in  the 
United   States,  then  with  the  collector  of  internal  revenue  at 
Baltimore,    Maryland,    in    such    form    as   the    Commissioner   of 
Internal   Revenue,   with  the   approval  of   the  Secretary  of  the 
Treasury,    shall    prescribe,    setting    forth    specifically   the    gross 
amount   of    income    from   all    separate    sources,    and    from   the 
total  thereof  deducting  the  aggregate  items  of  allowances  herein 
authorized;     Provided,    That    the    Commissioner    of    Internal 
Revenue  shall  have  authority  to  grant  a  reasonable  extension 
of  time,  in  meritorious  cases,  for  filing  returns  of  income  by 
persons  residing  or  traveling  abroad  who  are  required  to  make 
and   file   returns   of   income   and   who    are   unable   to   file   said 
returns  on  or  before  March  first  of  each  year :  Provided  further, 
That  the  aforesaid  return  may  be  made  by  an  agent  when  by 
reason    of    illness,    absence,    or   nonresidence   the   person    liable 
for  said   return  is  unable  to  make  and  render  the   same,  the 
agent   assuming   the    responsibility   of    making   the   return   and 
incurring   penalties    provided    for   erroneous,    false,    or    fraudu- 
lent return. 

(c)  Guardians,   trustees,   executors,   administrators,   receivers, 
conservators,  and  all  persons,  corporations,  or  associations  act- 
ing in  any  fiduciary  capacity,  shall  make  and  render  a  return 
of   the   income   of   the   person,   trust,    or   estate    for   whom   or 
which  they  act,  and  be  subject  to  all  the  provisions  of  this  title 
which  apply  to  individuals.     Such  fiduciary  shall  make  oath  that 
he  has  sufficient  knowledge  of  the  affairs  of  such  person,  trust, 
or  estate  to  enable  him  to  make  such  return  and  that  the  same 
is,  to  the  best  of  his  knowledge  and  belief,  true  and  correct, 
and  be  subject  to  all  the  provisions  of  this  title  which  apply 
to  individuals :  Provided,  That  a  return  made  by  one  of  two 
or    more    joint    fiduciaries    filed    in    the    district    where    such 
fiduciary  resides,   under   such   regulations   as   the   Secretary  of 
the   Treasury   may   prescribe,    shall   be   a   sufficient   compliance 
with  the  requirements  of  this  paragraph. 

Withholding        (d)  All    persons,    firms,    companies,    copartnerships,    corpora- 
Tax  at  Source  tions,    joint-stock    companies,    or    associations,    and    insurance 
companies,  except  as  hereinafter  provided,  in  whatever  capacity 


Returns  by 
Fiduciaries 


138 


APPENDIX   A 


acting,  having  the  control,  receipt,  disposal,  or  payment  of  fixed 
or  determinable  annual  or  periodical  gains,  profits,  and  income 
of  another  individual  subject  to  tax,  shall  in  behalf  of  such 
person  deduct  and  withhold  from  the  payment  an  amount 
equivalent  to  the  normal  tax  upon  the  same  and  make  and 
render  a  return,  as  aforesaid,  but  separate  and  distinct,  of  the 
portion  of  the  income  of  each  person  from  which  the  normal 
tax  has  been  thus  withheld,  and  containing  also  the  name  and 
address  of  such  person  or  stating  that  the  name  and  address 
or  the  address,  as  the  case  may  be,  are  unknown :  Provided, 
That  the  provision  requiring  the  normal  tax  of  individuals  to 
be  deducted  and  withheld  at  the  source  of  the  income  shall 
not  be  construed  to  require  the  withholding  of  such  tax  accord- 
ing to  the  two  per  centum  normal  tax  rate  herein  prescribed 
until  on  and  after  January  first,  nineteen  hundred  and  seven- 
teen, and  the  law  existing  at  the  time  of  the  passage  of  this 
Act  shall  govern  the  amount  withheld  or  to  be  withheld  at 
the  source  until  January  first,  nineteen  hundred  and  seventeen. 
That  in  either  case  mentioned  in  subdivisions  (c)  and  (d) 
of  this  section  no  return  of  income  not  exceeding  $3,000  shall 
be  required,  except  as  in  this  title  provided. 

Partnerships  (e)  Persons  carrying  on  business  in  partnership  shall  be 
liable  for  income  tax  only  in  their  individual  capacity,  and  the 
share  of  the  profits  of  the  partnership  to  which  any  taxable 
partner  would  be  entitled  if  the  same  were  divided,  whether 
divided  or  otherwise,  shall  be  returned  for  taxation  and  the 
tax  paid  under  the  provisions  of  this  title :  Provided,  That  from 
the  net  distributive  interests  on  which  the  individual  members 
shall  be  liable  for  tax,  normal  and  additional,  there  shall  be 
excluded  their  proportionate  shares  received  from  interest  on 
the  obligations  of  a  State  or  any  political  or  taxing  subdivision 
thereof,  and  upon  the  obligations  of  the  United  States  and  its 
possessions,  and  all  taxes  paid  to  the  United  States  or  to  any 
possession  thereof,  or  to  any  State,  county,  or  taxing  subdivision 
of  a  State,  and  that  for  the  purpose  of  computing  the  normal  tax 
there  shall  be  allowed  a  credit,  as  provided  by  section  five,  subdi- 
vision (b),  for  their  proportionate  share  of  the  profits  derived 
from  dividends.  And  such  partnership,  when  requested  by  the 
Commissioner  of  Internal  Revenue,  or  any  district  collector,  shall 
render  a  correct  return  of  the  earnings,  profits,  and  income  of 
the  partnership,  except  income  exempt  under  section  four  of 
this  Act,  setting  forth  the  item  of  the  gross  income  and  the 
deductions  and  credits  allowed  by  this  title,  and  the  names  and 


Interest  on 
State 

Obligations 
Excluded 


Dividends 
Excluded 


FEDERAL   INCOME   TAX   LAW 


139 


Withholding 
and  Paying 
Tax  at 
Source 


addresses  of  the  individuals  who  would  be  entitled  to  the  net 
earnings,  profits,  and  income,  if  distributed. 

(f)  In  every  return  shall  be  included  the  income  derived  from 
dividends  on  the  capital  stock  or  from  the  net  earnings  of  any 
corporation,   joint-stock   company   or   association,   or   insurance 
company,   except  that   in  the   case  of  nonresident  aliens   such 
income  derived  from   sources  without  the  United  States   shall 
not  be  included. 

(g)  An  individual  keeping  accounts  upon  any  basis  other  than 
that   of   actual   receipts   and   disbursements,   unless   such   other 
basis  does  not  clearly  reflect  his  income,  may,  subject  to  regu- 
lations made  by  the  Commissioner  of   Internal   Revenue,   with 
the  approval  of  the  Secretary  of  the  Treasury,  make  his  return 
upon  the  basis  upon  which  his  accounts  are  kept,  in  which  case 
the  tax  shall  be  computed  upon  his  income  as  so  returned. 

ASSES'SMENT    AND    ADMINISTRATION. 

SEC.  9.  (a)  That  all  assessments  shall  be  made  by  the  Com- 
missioner of  Internal  Revenue  and  all  persons  shall  be  notified 
of  the  amount  for  which  they  are  respectively  liable  on  or 
before  the  first  day  of  June  of  each  successive  year,  and  said 
amounts  shall  be  paid  on  or  before  the  fifteenth  day  of  June, 
except  in  cases  of  refusal  or  neglect  to  make  such  return  and 
in  cases  of  erroneous,  false,  or  fraudulent  returns,  in  which 
cases  the  Commissioner  of  Internal  Revenue  shall,  upon  the 
discovery  thereof,  at  any  time  within  three  years  after  said 
return  is  due,  or  has  been  made,  make  a  return  upon  infor- 
mation obtained  as  provided  for  in  this  title  or  by  existing 
law,  or  require  the  necessary  corrections  to  be  made,  and  the 
assessment  made  by  the  Commissioner  of  Internal  Revenue 
thereon  shall  be  paid  by  such  person  or  persons  immediately 
upon  notification  of  the  amount  of  such  assessment;  and  to 
any  sum  or  sums  due  and  unpaid  after  the  fifteenth  day  of  June 
in  any  year,  and  for  ten  days  after  notice  and  demand  tTiereof 
by  the  collector,  there  shall  be  added  the  sum  of  five  per  centum 
on  the  amount  of  tax  unpaid,  and  interest  at  the  rate  of 
one  per  centum  per  month  upon  said  tax  from  the  time  the 
same  became  due,  except  from  the  estates  of  insane,  deceased, 
or  insolvent  persons, 

(b)  All  persons,  firms,  copartnerships,  companies,  corpora- 
tions, joint-stock  companies,  or  associations,  and  insurance  com- 
panies, in  whatever  capacity  acting,  including  lessees  or  mort- 
gagors of  real  or  personal  property,  trustees  acting  in  any  trust 


140 


APPENDIX   A 


Exemption 
Certificate 
Must  be 
Filed  with 
Payer 


Penalty 
False  Claim 
for  Exemption 


Deductions 

How 

Obtained 


capacity,  executors,  administrators,  receivers,  conservators,  em- 
ployers, and  all  officers  and  employees  of  the  United  States 
having  the  control,  receipt,  custody,  disposal,  or  payment  of 
interest,  rent,  salaries,  wages,  premiums,  annuities,  compensa- 
tion, remuneration,  emoluments,  or  other  fixed  or  determinable 
annual  or  periodical  gains,  profits,  and  income  of  another  per- 
son, exceeding  $3,000  for  any  taxable  year,  other  than  income 
derived  from  dividends  on  capital  stock,  or  from  the  net  earn- 
ings of  corporations  and  joint-stock  companies  or  associations, 
or  insurance  companies,  the  income  of  which  is  taxable  under 
this  title,  who  are  required  to  make  and  render  a  return  in 
behalf  of  another,  as  provided  herein,  to  the  collector  of  his, 
her,  or  its  district,  are  hereby  authorized  and  required  to  de- 
duct and  withhold  from  such  annual  or  periodical  gains,  profits, 
and  income  such  sum  as  will  be  sufficient  to  pay  the  normal 
tax  imposed  thereon  by  this  title,  and  shall  pay  the  amount 
withheld  to  the  officer  of  the  United  States  Government  author- 
ized to  receive  the  same;  and  they  are  each  hereby  made  per- 
sonally liable  for  such  tax,  and  they  are  each  hereby  indemnified 
against  every  person,  corporation,  association,  or  demand  what- 
soever for  all  payments  which  they  shall  make  in  pursuance 
and  by  virtue  of  this  title. 

In  all  cases  where  the  income  tax  of  a  person  is  withheld 
and  deducted  and  paid  or  to  be  paid  at  the  source,  such  person 
shall  not  receive  the  benefit  of  the  personal  exemption  allowed 
in  section  seven  of  this  title  except  by  an  application  for  refund 
of  the  tax  unless  he  shall,  not  less  than  thirty  days  prior  to  the 
day  on  which  the  return  of  his  income  is  due,  file  with  the  person 
who  is  required  to  withhold  and  pay  tax  for  him  a  signed 
notice  in  writing  claiming  the  benefit  of  such  exemption,  and 
thereupon  no  tax  shall  be  withheld  upon  the  amount  of  such 
exemption :  Provided,  That  if  any  person  for  the  purpose  of 
obtaining  any  allowance  or  reduction  by  virtue  of  a  claim  for 
such  exemption,  either  for  himself  or  for  any  other  person, 
knowingly  makes  any  false  statement  or  false  or  fraudulent 
representation,  he  shall  be  liable  to  a  penalty  of  not  exceeding 
$300. 

And  where  the  income  tax  is  paid  or  to  be  paid  at  the  source, 
no  person  shall  be  allowed  the  benefit  of  any  deduction  pro- 
vided for  in  sections  five  or  six  of  this  title  unless  he  shall, 
not  less  than  thirty  days  prior  to  the  day  on  which  the  return 
of  his  income  is  due,  either  (1)  file  with  the  person  who  is 
required  to  withhold  and  pay  tax  for  him  a  true  and  correct 


FEDERAL   INCOME   TAX   LAW 


141 


Claim  for 
Deduction 
Maybe 
Made  to 
Payer 


Return  by 
Agent 


Normal  Tax 
Deductible 
from 
Coupons, 
etc. 

Irrespective 
of  Amount 
of  Income 


return  of  his  gains,  profits,  and  income  from  all  other  sources, 
and  also  the  deductions  asked  for,  and  the  showing  thus  made 
shall  then  become  a  part  of  the  return  to  be  made  in  his  behalf 
by  the  person  required  to  withhold  and  pay  the  tax,  or  (2) 
likewise  make  application  for  deductions  to  the  collector  of  the 
district  in  which  return  is  made  or  to  be  made  for  him :  Pro- 
vided, That  when  any  amount  allowable  as  a  deduction  is  known 
at  the  time  of  receipt  of  fixed  annual  or  periodical  income  by 
an  individual  subject  to  tax,  he  may  file  with  the  person,  firm, 
or  corporation  making  the  payment  a  certificate,  under  penalty 
for  false  claim,  and  in  such  form  as  shall  be  prescribed  by  the 
Commissioner  of  Internal  Revenue,  stating  the  amount  of  such 
deduction  and  making  a  claim  for  an  allowance  of  the  same 
against  the  amount  of  tax  otherwise  required  to  be  deducted 
and  withheld  at  the  source  of  the  income,  and  such  certificate 
shall  likewise  become  a  part  of  the  return  to  be  made  in  his 
behalf. 

If  such  person  is  absent  from  the  United  States,  or  is  unable 
owing  to  serious  illness  to  make  the  return  and  application 
above  provided  for,  the  return  and  application  may  be  made 
by  an  agent,  he  making  oath  that  he  has  sufficient  knowledge 
of  the  affairs  and  property  of  his  principal  to  enable  him  to 
make  a  full  and  complete  return,  and  that  the  return  and  appli- 
cation made  by  him  are  full  and  complete. 

(c)  The    amount    of    the    normal    tax    hereinbefore    imposed 
shall   be   deducted    and    withheld    from   fixed   or   determinable 
annual   or   periodical   gains,   profits,   and   income   derived    from 
interest  upon  bonds  and  mortgages,  or  deeds  of  trust  or  other 
similar  obligations  of  corporations,  joint-stock  companies,  asso- 
ciations, and  insurance  companies,  whether  payable  annually  or 
at  shorter  or  longer  periods,  although   such   interest  does  not 
amount  to  $3,000,  subject  to  the  provisions  of  this  title  requiring 
the  tax  to  be  withheld  at  the  source  and  deducted  from  annual 
income  and  returned  and  paid  to  the  Government. 

(d)  And  likewise  the  amount  of  such  tax  shall  be  deducted 
and  withheld  from  coupons,  checks,  or  bills  of  exchange  for  or 
in  payment  of  interest  upon  bonds   of   foreign   countries   and 
upon  foreign  mortgages  or  like  obligations   (not  payable  in  the 
United  States),  and  also  from  coupons,  checks,  or  bills  of  ex- 
change for  or  in  payment  of  any  dividends  upon  the  stock  or 
interest  upon  the  obligations   of   foreign  corporations,  associa- 
tions, and  insurance  companies  engaged  in  business  in  foreign 
countries, 


142 


APPENDIX   A 


Withholding  And  the  tax  in  such  cases  shall  be  withheld,  deducted,  and 
returned  for  and  in  behalf  of  any  person  subject  to  the  tax 
hereinbefore  imposed,  although  such  interest  or  dividends  do 
not  exceed  $3,000,  by  (1)  any  banker  or  person  who  shall  sell 
or  otherwise  realize  coupons,  checks,  or  bills  of  exchange  drawn 
or  made  in  payment  of  any  such  interest  or  dividends  (not 
payable  in  the  United  States),  and  (2)  any  person  who  shall 
obtain  payment  (not  in  the  United  States),  in  behalf  of  another 
of  such  dividends  and  interest  by  means  of  coupons,  checks, 
or  bills  of  exchange,  and  also  (3)  any  dealer  in  such  coupons 
who  shall  purchase  the  same  for  any  such  dividends  or  interest 
(not  payable  in  the  United  States),  otherwise  than  from  a 
banker  or  another  dealer  in  such  coupons. 

(e)  Where  the  tax  is  withheld  at  the  source,  the  benefit  of  the 
exemption  and  the  deductions  allowable  under  this  title  may  be 
had  by  complying  with  the  foregoing  provisions  of  this  section. 

License  (f)  All  persons,  firms,  or  corporations  undertaking  as  a  mat- 

Required  by^  ter  of  business  or  for  profit  the  collection  of  foreign  payments 
of  such  interest  or  dividends  by  means  of  coupons,  checks,  or 
bills  of  exchange  shall  obtain  a  license  from  the  Commissioner 
of  Internal  Revenue,  and  shall  be  subject  to  such  regulations 
enabling  the  Government  to  ascertain  and  verify  the  due  with- 
holding and  payment  of  the  income  tax  required  to  be  withheld 
and  paid  as  the  Commissioner  of  Internal  Revenue,  with  the 
approval  of  the  Secretary  of  the  Treasury,  shall  prescribe;  and 
any  person  who  shall  knowingly  undertake  to  collect  such  pay- 
ments as  aforesaid  without  having  obtained  a  license  therefor, 
or  without  complying  with  such  regulations,  shall  be  deemed 
guilty  of  a  misdemeanor  and  for  each  offense  be  fined  in  a  sum 
not  exceeding  $5,000,  or  imprisoned  for  a  term  not  exceeding  one 
year,  or  both,  in  the  discretion  of  the  court. 


Collectors  of 

Foreign 

Payments 


General 
Assessment 
of  Income 


(g)  The  tax  herein  imposed  upon  gains,  profits,  and  income 
not  falling  under  the  foregoing  and  not  returned  and  paid  by 
virtue  of  the  foregoing  shall  be  assessed  by  personal  return 
under  rules  and  regulations  to  be  prescribed  by  the  Commissioner 
of  Internal  Revenue  and  approved  by  the  Secretary  of  the 
Treasury.  The  intent  and  purpose  of  this  title  is  that  all 
gains,  profits,  and  income  of  a  taxable  class,  as  defined  by  this 
title,  shall  be  charged  and  assessed  with  the  corresponding  tax, 
normal  and  additional,  prescribed  by  this  title,  and  said  tax 
shall  be  paid  by  the  owner  of  such  income,  or  the  proper  repre- 
sentative having  the  receipt,  custody,  control,  or  disposal  of  the 
same.  For  the  purpose  of  this  title  ownership  or  liability  shall 


FEDERAL   INCOME   TAX   LAW 


143 


Income  of 
Corporations, 
etc.,  Subject 
to  Tax 


Rate 


Dividends 
Defined 


Calendar  or 
Fiscal  Year 


be  determined  as  of  the  year  for  which  a  return  is  required  to 
be  rendered. 

The  provisions  of  this  title  relating  to  the  deduction  and  pay- 
ment of  the  tax  at  the  source  of  income  shall  only  apply  to  the 
normal  tax  hereinbefore  imposed  upon  individuals. 

PART  II. — ON  CORPORATIONS. 

SEC.  10.  That  there  shall  be  levied,  assessed,  collected,  and 
paid  annually  upon  the  total  net  income  received  in  the  preceding 
calendar  year  from  all  sources  by  every  corporation,  joint-stock 
company  or  association,  or  insurance  company,  organized  in  the 
United  States,  no  matter  how  created  or  organized  but  not 
including  partnerships,  a  tax  of  two  per  centum  upon  such 
income ;  and  a  like  tax  shall  be  levied,  assessed,  collected,  and 
paid  annually  upon  the  total  net  income  received  in  the  pre- 
ceding calendar  year  from  all  sources  within  the  United  States' 
by  every  corporation,  joint-stock  company  or  association,  or 
insurance  company*  organized,  authorized,  or  existing  under  the 
laws  of  any  foreign  country,  including  interest  on  bonds,  notes, 
or  other  interest-bearing  obligations  of  residents,  corporate  or 
otherwise,  and  including  the  income  derived  from  dividends  on 
capital  stock  or  from  net  earnings  of  resident  corporations, 
joint-stock  companies  or  associations,  or  insurance  companies 
whose  net  income  is  taxable  under  this  title :  Provided,  That  the 
term  "  dividends "  as  used  in  this  title  shall  be  held  to  mean 
any  distribution  made  or  ordered  to  be  made  by  a  corporation, 
joint-stock  company,  association,  or  insurance  company,  out  of 
its  earnings  or  profits  accrued  since  March  first,  nineteen  hundred 
and  thirteen,  and  payable  to  its  shareholders,  whether  in  cash 
or  in  stock  of  the  corporation,  joint-stock  company,  association, 
or  insurance  company,  which  stock  dividend  shall  be  considered 
income,  to  the  amount  of  its  cash  value. 

The  foregoing  tax  rate  shall  apply  to  the  total  net  income 
received  by  every  taxable  corporation,  joint-stock  company  or 
association,  or  insurance  company  in  the  calendar  year  nineteen 
hundred  and  sixteen  and  in  each  year  thereafter,  except  that 
if  it  has  fixed  its  own  fiscal  year  under  the  provisions  of  existing 
law,  the  foregoing  rate  shall  apply  to  the.  proportion  of  the 
total  net  income  returned  for  the  fiscal  year  ending  prior  to 
December  thirty-first,  nineteen  hundred  and  sixteen,  which  the 
period  between  January  first,  nineteen  hundred  and  sixteen,  and 
the  end  of  such  fiscal  year  bears  to  the  whole  of  such  fiscal 
year,  and  the  rate  fixed  in  Section  II  of  the  Act  approved 
October  third,  nineteen  hundred  and  thirteen,  entitled  "An  Act 


144  APPENDIX   A 

to  reduce  tariff  duties  and  to  provide  revenue  for  the  Govern- 
ment, and  for  other  purposes,"  shall  apply  to  the  remaining 
portion  of  the  total  net  income  returned  for  such  fiscal  year. 

Ascertaining  For  the  purpose  of  ascertaining^  the  gain  derived  or  loss 
Profit  or  Loss  sustained  from  the  sale  or  other  disposition  by  a  corporation, 
joint-stock  company  or  association,  or  insurance  company,  of 
property,  real,  personal,  or  mixed,  acquired  before  March  first, 
nineteen  hundred  and  thirteen,  the  fair  market  price  or  value 
of  such  property  as  of  March  first,  nineteen  hundred  and  thir- 
teen, shall  be  the  basis  for  determining  the  amount  of  such 
gain  derived  or  loss  sustained. 

CONDITIONAL    AND    OTHER    EXEMPTIONS. 

Organizations      SEC.  11.   (a)  That  there   shall  not  be  taxed   under  this   title 
Not  Taxable    anv  income  received  by  any — 

First.  Labor,  agricultural,   or  horticultural  organization. 

Second.  Mutual  savings  bank  not  having  a  capital  stock  repre- 
sented by  shares ; 

Third.  Fraternal  beneficiary  society,  order,  or  association, 
operating  under  the  lodge  system  or  for  the  exclusive  benefit 
of  the  members  of  a  fraternity  itself  operating  under  the  lodge 
system,  and  providing  for  the  payment  of  life,  sick,  accident, 
or  other  benefits  to  the  members  of  such  society,  order,  or 
association  or  their  dependents; 

Fourth.  Domestic  building  and  loan  association  and  coopera- 
tive banks  without  capital  stock  organized  and  operated  for 
mutual  purposes  and  without  profit ; 

Fifth.  Cemetery  company  owned  and  operated  exclusively 
for  the  benefit  of  its  members; 

Sixth.  Corporation  or  association  organized  and  operated  ex- 
clusively for  religious,  charitable,  scientific,  or  educational  pur- 
poses, no  part  of  the  net  income  of  which  inures  to  the  benefit 
of  any  private  stockholder  or  individual ; 

Seventh.  Business  league,  chamber  of  commerce,  or  board  of 
trade,  not  organized  for  profit  and  no  part  of  the  net  income 
of  which  inures  to  the  benefit  of  any  private  stockholder  or 
individual : 

Eighth.  Civic  league  or  organization  not  organized  for  profit 
but  operated  exclusively  for  the  promotion  of  social  welfare; 

Ninth.  Club  organized  and  operated  exclusively  for  pleasure, 
recreation,  and  other  nonprofitable  purposes,  no  part  of  the 
net  income  of  which  inures  to  the  benefit  of  any  private  stock- 
holder or  member ; 

Tenth.  Farmers'  or  other  mutual  hail,  cyclone,  or  fire  insur- 


FEDERAL   INCOME   TAX   LAW  145 

ance  company,  mutual  ditch  or  irrigation  company,  mutual  or 
cooperative  telephone  company,  or  like  organization  of  a  purely 
local  character,  the  income  of  which  consists  solely  of  assess- 
ments, dues,  and  fees  collected  from  members  for  the  sole 
purpose  of  meeting  its  expenses; 

Eleventh.  Farmers',  fruit  growers',  or  like  association,  or- 
ganized and  operated  as  a  sales  agent  for  the  purpose  of 
marketing  the  products  of  its  members  and  turning  back  to 
them  the  proceeds  of  sales,  less  the  necessary  selling  expenses, 
on  the  basis  of  the  quantity  of  produce  furnished  by  them; 

Twelfth.  Corporation  or  association  organized  for  the  exclu- 
sive purpose  of  holding  title  to  property,  collecting  income  there- 
from, and  turning  over  the  entire  amount  thereof,  less  expenses, 
to  an  organization  which  itself  is  exempt  from  the  tax  imposed 
by  this  title;  or 

Thirteenth.  Federal  land  banks  and  national  farm-loan  asso- 
ciations as  provided  in  section  twenty-six  of  the  Act  approved 
July  seventeenth,  nineteen  hundred  and  sixteen,  entitled  "An 
Act  to  provide  capital  for  agricultural  development,  to  create 
standard  forms  of  investment  based  upon  farm  mortgage,  to 
equalize  rates  of  interest  upon  farm  loans,  to  furnish  a  market 
for  United  States  bonds,  to  create  Government  depositaries 
and  financial  agents  for  the  United  States,  and  for  other 
purposes." 

Fourteenth.  Joint  stock  land  banks  as  to  income  derived  from 
bonds  or  debentures  of  other  joint  stock  land  banks  or  any 
Federal  land  bank  belonging  to  such  joint  stock  land  bank. 

(b)  There  shall  not  be  taxed  under  this  title  any  income 
derived  from  any  public  utility  or  from  the  exercise  of  any 
essential  governmental  function  accruing  to  any  State,  Terri- 
tory, or  the  District  of  Columbia,  or  any  political  subdivision 
of  a  State  or  Territory,  nor  any  income  accruing  to  the  govern- 
ment of  the  Philippine  Islands  or  Porto  Rico,  or  of  any  political 
subdivision  of  the  Philippine  Islands  or  Porto  Rico:  Provided, 
That  whenever  any  State,  Territory,  or  the  District  of  Columbia, 
or  any  political  subdivision  of  a  State  or  Territory,  has,  prior 
to  the  passage  of  this  title,  entered  in  good  faith  into  a  contract 
with  any  person  or  corporation,  the  object  and  purpose  of  which 
is  to  acquire,  construct,  operate,  or  maintain  a  public  utility, 
no  tax  shall  be  levied  under  the  provisions  of  this  title  upon 
the  income  derived  from  the  operation  of  such  public  utility, 
so  far  as  the  payment  thereof  will  impose  a  loss  or  burden 
upon  such  State,  Territory,  or  the  District  of  Columbia,  or  a 
political  subdivision  of  a  State  or  Territory;  but  this  provision 


146 


APPENDIX   A 


is  not  intended  to  confer  upon  such  person  or  corporation  any 
financial  gain  or  exemption  or  to  relieve  such  person  or  cor- 
poration from  the  payment  of  a  tax  as  provided  for  in  this  title 
upon  the  part  or  portion  of  the  said  income  to  which  such 
person  or  corporation  shall  be  entitled  under  such  contract. 

DEDUCTIONS. 

Deductions  SEC.  12.  (a)  In  the  case  of  a  corporation,  joint-stock  corn- 
Allowed  to  pany  or  association,  or  insurance  company,  organized  in  the 
Domestic  ^  United  States,  such  net  income  shall  be  ascertained  by  deducting 

from  the  gross  amount  of  its  income  received  within  the  year 

from  all  sources — 

Necessary  First.  All  the  ordinary  and  necessary  expenses  paid  within  the 

Expenses  year  in  the  maintenance  and  operation  of  its  business  and  prop- 
erties, including  rentals  or  other  payments  required  to  be  made 
as  a  condition  to  the  continued  use  or  possession  of  property  to 
which  the  corporation  has  not  taken  or  is  not  taking  title, 
or  in  which  it  has  no  equity. 

Second.  All  losses  actually  sustained  and  charged  off  within 
the  year  and  not  compensated  by  insurance  or  otherwise,  includ- 
ing a  reasonable  allowance  for  the  exhaustion,  wear  and  tear 
of  property  arising  out  of  its  use  or  employment  in  the  business 
or  trade;  (a)  in  the  case  of  oil  and  gas  wells  a  reasonable 
allowance  for  actual  reduction  in  flow  and  production  to  be 
ascertained  not  by  the  flush  flow,  but  by  the  settled  production 
or  regular  flow ;  (b)  in  the  case  of  mines  a  reasonable  allowance 
for  depletion  thereof  not  to  exceed  the  market  value  in  the 
mine  of  the  product  thereof  which  has  been  mined  and  sold 
during  the  year  for  which  the  return  and  computation  are  made,  > 
such  reasonable  allowance  to  be  made  in  the  case  of  both  (a) 
and  (b)  under  rules  and  regulations  to  be  prescribed  by  the 
Limitation  Secretary  of  the  Treasury:  Provided,  That  when  the  allowance 
of  Depletion  authorized  in  (a)  and  (b)  shall  equal  the  capital  originally 
invested,  or  in  case  of  purchase  made  prior  to  March  first, 
nineteen  hundred  and  thirteen,  the  fair  market  value  as  of 
that  date,  no  further  allowance  shall  be  made;  and  (c)  in  the 
case  of  insurance  companies,  the  net  addition,  if  any,  required 
by  law  to  be  made  within  the  year  to  reserve  funds  and  the 
sums  other  than  dividends  paid  within  the  year  on  policy  and 
Improvements  annuity  contracts :  Provided,  That  no  deduction  shall  be  allowed 
for  any  amount  paid  out  for  new  buildings,  permanent  improve- 
ments, or  betterments  made  to  increase  the  value  of  any 
property  or  estate,  and  no  deduction  shall  be  made  for  any 


Losses 

Depreciation 

Depletion 


FEDERAL   INCOME   TAX   LAW 


147 


amount  of  expense  of  restoring  property  or  making  good  the 
exhaustion  thereof  for  which  an  allowance  is  or  has  been  made: 
Provided  further,  That  mutual  fire  and  mutual  employers'  lia- 
bility and  mutual  workmen's  compensation  and  mutual  casualty 
insurance  companies  requiring  their  members  to  make  premium 
deposits  to  provide  for  losses  and  expenses  shall  not  return  as 
income  any  portion  of  the  premium  deposits  returned  to  their 
policyholders,  but  shall  return  as  taxable  income  all  income 
received  by  them  from  all  other  sources  plus  such  portions 
of  the  premium  deposits  as  are  retained  by  the  companies  for 
purposes  other  than  the  payment  of  losses  and  expenses  and 
reinsurance  reserves :  Provided  further,  That  mutual  marine 
insurance  companies  shall  include  in  their  return  of  gross  income 
gross  premiums  collected  and  received  by  them  less  amounts 
paid  for  reinsurance,  but  shall  be  entitled  to  include  in  deduc- 
tions from  gross  income  amounts  repaid  to  policyholders  on 
account  of  premiums  previously  paid  by  them  and  interest  paid 
upon  such  amounts  between  the  ascertainment  thereof  and  the 
payment  thereof,  and  life  insurance  companies  shall  not  include 
as  income  in  any  year  such  portion  of  any  actual  premium 
received  from  any  individual  policyholder  as  shall  have  been 
paid  back  or  credited  to  such  individual  policyholder,  or  treated 
as  an  abatement  of  premium  of  such  individual  policyholder, 
within  such  year; 

Third.  The  amount  of  interest  paid  within  the  year  on  its 
indebtedness  to  an  amount  of  such  indebtedness  not  in  excess 
of  the  sum  of  (a)  the  entire  amount  of  the  paid-up  capital 
stock  outstanding  at  the  close  of  the  year,  or,  if  no  capital 
stock,  the  entire  amount  of  capital  employed  in  the  business  at 
the  close  of  the  year,  and  (b)  one-half  of  its  interest-bearing 
indebtedness  then  outstanding:  Provided,  That  for  the  purpose 
of  this  title  preferred  capital  stock  shall  not  be  considered  in- 
terest-bearing indebtedness,  and  interest  or  dividends  paid  upon 
this  stock  shall  not  be  deductible  from  gross  income :  Provided 
further,  That  in  cases  wherein  shares  of  capital  stock  are  issued 
without  par  or  nominal  value,  the  amount  of  paid-up  capital 
stock,  within  the  meaning  of  this  section,  as  represented  by 
such  shares,  will  be  the  amount  of  cash,  or  its  equivalent,  paid 
or  transferred  to  the  corporation  as  a  consideration  for  such 
shares:  Provided  further,  That  in  the  case  of  indebtedness 
wholly  secured  by  property  collateral,  tangible  or  intangible,  the 
subject  of  sale  or  hypothecation  in  the  ordinary  business  of  such 
corporation,  joint-stock  company  or  association  as  a  dealer  only 
in  the  property  constituting  such  collateral,  or  in  loaning  the 


148 


APPENDIX   A 


Taxes 


Income  of 
Foreign 


funds  thereby  procured,  the  total  interest  paid  by  such  corpora- 
tion, company,  or  association  within  the  year  on  any  such  in- 
debtedness may  be  deducted  as  a  part  of  its  expenses  of  doing 
business,  but  interest  on  such  indebtedness  shall  only  be  de- 
ductible on  an  amount  of  such  indebtedness  not  in  excess  of  the 
actual  value  of  such  property  collateral :  Provided  further,  That 
in  the  case  of  bonds  or  other  indebtedness,  which  have  been 
issued  with  a  guaranty  that  the  interest  payable  thereon  shall 
be  free  from  taxation,  no  deduction  for  the  payment  of  the 
tax  herein  imposed,  or  any  other  tax  paid  pursuant  to  such 
guaranty,  shall  be  allowed;  and  in  the  case  of  a  bank,  banking 
association,  loan  or  trust  company,  interest  paid  within  the 
year  on  deposits  or  on  moneys  received  for  investment  and  se- 
cured by  interest-bearing  certificates  of  indebtedness  issued  by 
such  bank,  banking  association,  loan  or  trust  company; 

Fourth.  Taxes  paid  within  the  year  imposed  by  the  authority 
of  the  United  States,  or  its  Territories,  or  possessions,  or  any 
foreign  country,  or  under  the  authority  of  any  State,  county, 
school  district,  or  municipality,  or  other  taxing  subdivision  of 
any  State,  not  including  those  assessed  against  local  benefits. 

(b)  In  the  case  of  a  corporation,  joint-stock  company  or 
association,  or  insurance  company,  organized,  authorized,  or 


Corporations  existing  under  the  laws  of  any  foreign  country,  such  net  income 
shall  be  ascertained  by  deducting  from  the  gross  amount  of  its 
income  received  within  the  year  from  all  sources  within  the 
United  States — 

Deductions         First.    All  the  ordinary  and  necessary  expenses  actually  paid 
Allowed  within  the  year  out  of  earnings  in  the  maintenance  and  opera- 

Foreign  ^         tjon  Of  its  business  and  property  within  the  United  States,  in- 
corporations   ciu(jing  rentals   or   other  payments   required  to   be   made   as   a 
condition   to   the   continued   use   or   possession   of   property    to 
which  the  corporation  has  not  taken  or  is  not  taking  title,  or  in 
which  it  has  no  equity. 


Losses 

Depreciation 
Depletion 


Second.  All  losses  actually  sustained  within  the  year  in 
business  or  trade  conducted  by  it  within  the  United  States  and 
not  compensated  by  insurance  or  otherwise,  including  a  rea- 
sonable allowance  for  the  exhaustion,  wear  and  tear  of  property 
arising  out  of  its  use  or  employment  in  the  business  or  trade; 
(a)  and  in  the  case  (a)  of  oil  and  gas  wells  a  reasonable  allow- 
ance for  actual  reduction  in  flow  and  production  to  be  ascer- 
tained not  by  the  flush  flow,  but  by  the  settled  production  or 
regular  flow;  (b)  in  the  case  of  mines  a  reasonable  allowance 


FEDERAL   INCOME   TAX   LAW 


149 


for  depletion  thereof  not  to  exceed  the  market  value  in  the 
mine  of  the  product  thereof  which  has  been  mined  and  sold 
during  the  year  for  which  the  return  and  computation  are 
made,  such  reasonable  allowance  to  be  made  in  the  case  of  both 
(a)  and  (b)  under  rules  and  regulations  to  be  prescribed  by 
Limitation  the  Secretary  of  the  Treasury:  Provided,  That  when  the  allow- 
of  Depletion  ance  authorized  in  (a)  and  (b)  shall  equal  the  capital  originally 
invested,  or  in  case  of  purchase  made  prior  to  March  first,  nine- 
teen hundred  and  thirteen,  the  fair  market  value  as  of  that 
date,  no  further  allowance  shall  be  made;  and  (c)  in  the  case 
of  insurance  companies,  the  net  addition,  if  any,  required  by 
law  to  be  made  within  the  year  to  reserve  funds  and  the  sums 
other  than  dividends  paid  within  the  year  on  policy  and  annu- 
Improvements  ity  contracts :  Provided,  That  no  deduction  shall  be  allowed  for 
any  amount  paid  out  for  new  buildings,  permanent  improve- 
ments, or  betterments,  made  to  increase  the  value  of  any  property 
or  estate,  and  no  deduction  shall  be  made  for  any  amount  of 
expense  of  restoring  property  or  making  good  the  exhaustion 
thereof  for  which  an  allowance  is  or  has  been  made:  Provided, 
Mutual  further,  That  mutual  fire  and  mutual  employers'  liability  and 

Companies  mutual  workmen's  compensation  and  mutual  casualty  insurance 
companies  requiring  their  members  to  make  premium  deposits 
to  provide  for  losses  and  expenses  shall  not  return  as  income 
any  portion  of  the  premium  deposits  returned  to  their  policy- 
holders,  but  shall  return  as  taxable  income  all  income  received 
by  them  from  all  other  sources  plus  such  portions  of  the  pre- 
mium deposits  as  are  retained  by  the  companies  for  purposes 
other  than  the  payment  of  losses  and  expenses  and  reinsurance 
reserves :  Provided  further,  That  mutual  marine  insurance  com- 
panies shall  include  in  their  return  of  gross  income  gross  pre- 
miums collected  and  received  by  them  less  amounts  paid  for 
reinsurance,  but  shall  be  entitled  to  include  in  deductions  from 
gross  income  amounts  repaid  to  policyholders  on  account  of 
premiums  previously  paid  by  them,  and  interest  paid  upon  such 
amounts  between  the  ascertainment  thereof  and  the  payment 
thereof,  and  life  insurance  companies  shall  not  include  as  in- 
come in  any  year  such  portion  of  any  actual  premium  received 
from  any  individual  policyholder  as  shall  have  been  paid  back 
or  credited  to  such  individual  policyholder,  or  treated  as  an 
abatement  of  premium  of  such  individual  policyholder,  within 
such  year; 

Interest  Third.     The  amount  of  interest  paid  within  the  year  on  its 

indebtedness  to  an  amount  of  such  indebtedness  not  in  excess 
of  the  proportion  of  the  sum  of   (a)  the  entire  amount  of  the 


150 


APPENDIX   A 


Interest 
Deductible 


Limitation  of  paid-up  capital  stock  outstanding  at  the  close  of  the  year,  or, 
if  no  capital  stock,  the  entire  amount  of  the  capital  employed 
in  the  business  at  the  close  of  the  year,  and  (b)  one-half  of 
its  interest-bearing  indebtedness  then  outstanding,  which  the 
gross  amount  of  its  income  for  the  year  from  business  transc- 
acted  and  capital  invested  within  the  United  States  bears  to  the 
gross  amount  of  its  income  derived  from  all  sources  within 
and  without  the  United  States :  Provided,  That  in  the  case  of 
bonds  or  other  indebtedness  which  have  been  issued  with  a 
guaranty  that  the  interest  payable  thereon  shall  be  free  from 
taxation,  no  deduction  for  the  payment  of  the  tax  herein  im- 
posed or  any  other  tax  paid  pursuant  to  such  guaranty  shall 
be  allowed ;  and  in  case  of  a  bank,  banking  association,  loan 
or  trust  company,  or  branch  thereof,  interest  paid  within  the 
year  on  deposits  by  or  on  moneys  received  for  investment  from 
either  citizens  or  residents  of  the  United  States  and  secured 
by  interest-bearing  certificates  of  indebtedness  issued  by  such 
bank,  banking  association,  loan  or  trust  company,  or  branch 
thereof ; 


Taxes 


Reserve 

Insurance 

Companies 

not 

Deductible 


Tax  Year 


Fiscal  Year 


Fourth.  Taxes  paid  within  the  year  imposed  by  the  authority 
of  the  United  States,  or  its  Territories,  or  possessions,  or  under 
the  authority  of  any  State,  county,  school  district,  or  munic- 
ipality, or  other  taxing  subdivision  of  any  State,  paid  within 
the  United  States,  not  including  those  assessed  against  local 
benefits. 

(c)  In  the  case  of  assessment  insurance  companies,  whether 
domestic  or  foreign,  the  actual  deposit  of  sums  with  State  or 
Territorial  officers,  pursuant  to  law,  as  additions  to  guarantee 
or  reserve  funds  shall  be  treated  as  being  payments  required 
by  law  to  reserve  funds. 

RETURNS. 

SEC.  13.  (a)  The  tax  shall  be  computed  upon  the  net  income, 
as  thus  ascertained,  received  within  each  preceding  calendar 
year  ending  December  thirty-first:  Provided,  That  any  cor- 
poration, joint-stock  company  or  association,  or  insurance  com- 
pany, subject  to  this  tax,  may  designate  the  last  day  of  any 
month  in  the  year  as  the  day  of  the  closing  of  its  fiscal  year 
and  shall  be  entitled  to  have  the  tax  payable  by  it  computed 
upon  the  basis  of  the  net  income  ascertained  as  herein  provided 
for  the  year  -ending  on  the  day  so  designated  in  the  year  pre- 
ceding the  date  of  assessment  instead  of  upon  the  basis  of  the 
net  income  for  the  calendar  year  preceding  the  date  of  assess- 
ment; and  it  shall  give  notice  of  the  day  it  has  thus  designated 


FEDERAL   INCOME   TAX   LAW 


151 


as  the  closing  of  its  fiscal  year  to  the  collector  of  the  district 
in  which  its  principal  business  office  is  located  at  any  time  not 
less  than  thirty  days  prior  to  the  first  day  of  March  of  the 
year  in  which  its  return  would  be  filed  if  made  upon  the  basis 
of  the  calendar  year; 

(b)  Every  corporation,  joint-stock  company  or  association, 
or  insurance  company,  subject  to  the  tax  herein  imposed,  shall, 
on  or  before  the  first  day  of  March,  nineteen  hundred  and 
seventeen,  and  the  first  day  of  March  in  each  year  thereafter, 
or,  if  it  has  designated  a  fiscal  year  for  the  computation  of  its 
tax,  then  within  sixty  days  after  the  close  of  such  fiscal  year 
ending  prior  to  December  thirty-first,  nineteen  hundred  and  six- 
teen, and  the  close  of  each  such  fiscal  year  thereafter,  render 
a  true  and  accurate  return  of  its  annual  net  income  in  the  man- 
ner and  form  to  be  prescribed  by  the  Commissioner  of  Internal 
Revenue,  with  the  approval  of  the  Secretary  of  the  Treasury, 
and  containing  such  facts,  data,  and  information  as  are  appro- 
priate and  in  the  opinion  of  the  commissioner  necessary  to 
determine  the  correctness  of  the  net  income  returned  and  to 
carry  out  the  provisions  of  this  title.  The  return  shall  be  sworn 
to  by  the  president,  vice  president,  or  other  principal  officer, 
and  by  the  treasurer  or  assistant  treasurer.  The  return  shall 
be  made  to  the  collector  of  the  district  in  which  is  located  the 
principal  office  of  the  corporation,  company,  or  association, 
where  are  kept  its  books  of  account  and  other  data  from  which 
the  return  is  prepared,  or  in  the  case  of  a  foreign  corporation, 
company,  or  association,  to  the  collector  of  the  district  in  which 
is  located  its  principal  place  of  business  in  the  United  States, 
or  if  it  have  no  principal  place  of  business,  office,  or  agency 
in  the  United  States,  then  to  the  collector  of  internal  revenue 
at  Baltimore,  Maryland.  All  such  returns  shall  as  received  be 
transmitted  forthwith  by  the  collector  to  the  Commissioner  of 
Internal  Revenue; 

Receivers,  (c)  *n    cases    wherein    receivers,    trustees    in   bankruptcy,    or 

Trustees,  etc.,  assignees  are  operating  the  property  or  business  of  corpora- 
Must  Make  tions,  joint-stock  companies  or  associations,  or  insurance  com- 
panies, subject  to  tax  imposed  by  this  title,  such  receivers, 
trustees,  or  assignees  shall  make  returns  of  net  income  as  and 
for  such  corporations,  joint-stock  companies  or  associations, 
and  insurance  companies,  in  the  same  manner  and  form  as  such 
organizations  are  hereinbefore  required  to  make  returns,  and 
any  income  tax  due  on  the  basis  of  such  returns  made  by  re- 
ceivers, trustees,  or  assignees  shall  be  assessed  and  collected 


152 


APPENDIX   A 


Basis  of 
Keeping 
Accounts 


Withholding 
Tax 


Interest 


in  the  same  manner  as  if  assessed  directly  against  the  organi- 
zations of  whose  businesses  or  properties  they  have  custody 
and  control; 

(d)  A    corporation,    joint-stock    company    or    association,    or 
insurance  company,  keeping  accounts  upon  any. basis  other  than 
that   of   actual   receipts    and    disbursements,    unless    such    other 
basis  does  not  clearly  reflect  its  income,  may,  subject  to  regu- 
lations  made  by  the   Commissioner  of   Internal   Revenue,   with 
the  approval  of  the  Secretary  of  the  Treasury,  make  its  return 
upon  the  basis  upon  which  its  accounts  are  kept,  in  which  case 
the  tax  shall  be  computed  upon  its  income  as  so  returned; 

(e)  All  the  provisions  of  this  title  relating  to  the  tax  author- 
ized and  required    to    be    deducted  and  withheld  and  paid  to 
the    officer    of    the    United    States    Government    authorized    to 
receive  the   same   from  the   income   of   nonresident  alien   indi- 
viduals  from  sources   within  the  United   States   shall  be  made 
applicable   to   incomes   derived    from   interest   upon   bonds   and 
mortgages  or  deeds  of  trust  or  similar  obligations  of  domestic 
or  other  resident  corporations,  joint-stock  companies   or  asso- 

Nonresident    ciations,   and   insurance   companies   by   nonresident   alien   firms, 
Organizations  copartnerships,    companies,    corporations,    joint-stock    companies 
or  associations,  and  insurance  companies  not  engaged  in  busi- 
ness  or  trade   within   the   United    States    and    not   having   any 
office  or  place  of  business  therein ; 

Dividends  (0  Likewise,  all  the  provisions  of  this  title  relating  to  the 

tax  authorized  and  required  to  be  deducted  and  withheld  and 
paid  to  the  officer  of  the  United  States  Government  authorized 
to  receive  the  same  from  the  income  of  nonresident  alien  in- 
dividuals from  sources  within  the  United  States  shall  be  made 
applicable  to  income  derived  from  dividends  upon  the  capital 
stock  or  from  the  net  earnings  of  domestic  or  other  resident 
corporations,  joint-stock  companies  or  associations,  and  insur- 
Nonresident  ance  companies  by  nonresident  alien  companies,  corporations, 
Organizations  j oint-stock  companies  or  associations,  and  insurance  companies 
not  engaged  in  business  or  trade  within  the  United  States  and 
not  having  any  office  or  place  of  business  therein. 


ASSESSMENT  AND  ADMINISTRATION. 

Assessments  SEC.  14.  (a)  All  assessments  shall  be  made  and  the  several 
corporations,  joint-stock  companies  or  associations,  and  insur- 
ance companies  shall  be  notified  of  the  amount  for  which  they 
are  respectively  liable  on  or  before  the  first  day  of  June  of 
each  successive  year,  and  said  assessment  shall  be  paid  on  or 


FEDERAL   INCOME   TAX   LAW 


153 


Payment  of 
Tax  When 
Due 


Penalty 
Delayed 
Payment 


Returns 
Constitute 
Public 
Records 


Conditions 
Inspection 


before  the  fifteenth  day  of  June;  Provided,  That  every  corpora- 
tion, joint-stock  company  or  association,  and  insurance  company, 
computing  taxes  upon  the  income  of  the  fiscal  year  which  it 
may  designate  in  the  manner  hereinbefore  provided,  shall  pay 
the  taxes  due  under  its  assessment  within  one  hundred  and  five 
days  after  the  date  upon  which  it  is  required  to  file  its  list 
or  return  of  income  for  assessment;  except  in  cases  of  refusal 
or  neglect  to  make  such  return,  and  in  cases  of  erroneous,  false, 
or  fraudulent  returns,  in  which  cases  the  Commissioner  of 
Internal  Revenue  shall,  upon  the  discovery  thereof,  at  any  time 
within  three  years  after  said  return  is  due,  make  a  return  upon 
information  obtained  as  provided  for  in  this  title  or  by  existing 
law;  and  the  assessment  made  by  the  Commissioner  of  Internal 
Revenue  thereon  shall  be  paid  by  such  corporation,  joint-stock 
company  or  association,  or  insurance  company  immediately  upon 
notification  of  the  amount  of  such  assessment;  and  to  any  sum 
or  sums  due  and  unpaid  after  the  fifteenth  day  of  June  in  any 
year,  or  after  one  hundred  and  five  days  from  the  date  on  which 
the  return  of  income  is  required  to  be  made  by  the  taxpayer,  and 
after  ten  days'  notice  and  demand  thereof  by  the  collector,  there 
shall  be  added  the  sum  of  five  per  centum  on  the  amount  of  tax 
unpaid  and  interest  at  the  rate  of  one  per  centum  per  month 
upon  said  tax  from  the  time  the  same  becomes  due;  Provided, 
That  upon  the  examination  of  any  return  of  income  made  pur- 
suant to  this  title,  the  Act  of  August  fifth,  nineteen  hundred  and 
nine,  entitled,  "An  Act  to  provide  revenue,  equalize  duties  and 
encourage  the  industries  of  the  United  States,  and  for  other 
purposes,"  and  the  Act  of  October  third,  nineteen  hundred  and 
thirteen,  entitled,  "  An  Act  to  reduce  tariff  duties  and  to  provide 
revenue  for  the  Government,  and  for  other  purposes,"  if  it  shall 
appear  that  amounts  of  tax  have  been  paid  in  excess  of  those 
properly  due,  the  taxpayer  shall  be  permitted  to  present  a  claim 
for  refund  thereof  notwithstanding  the  provisions  of  section 
thirty-two  hundred  and  twenty-eight  of  the  Revised  Statutes; 

(b)  When  the  assessment  shall  be  made,  as  provided  in  this 
title,  the  returns,  together  with  any  corrections  thereof  which 
may  have  been  made  by  the  commissioner,  shall  be  filed  in  the 
office  of  the  Commissioner  of  Internal  Revenue  and  shall  con- 
stitute public  records  and  be  open  to  inspection  as  such;  Pro- 
Of  vidcd,  That  any  and  all  such  returns  shall  be  open  to  inspection 
only  upon  the  order  of  the  President,  under  rules  and  regula- 
tions to  be  prescribed  by  the  Secretary  of  the  Treasury  and 
approved  by  the  President;  Provided  further,  That  the  proper 
officers  of  any  State  imposing  a  general  income  tax  may,  upon 


154 


APPENDIX   A 


False  Return 


the  request  of  the  governor  thereof,  have  access  to  said  returns 
or  to  an  abstract  thereof,  showing  the  name  and  income  of  each 
such  corporation,  joint-stock  company  or  association,  or  insur- 
ance company,  at  such  times  and  in  such  manner  as  the  Secre- 
tary of  the  Treasury  may  prescribe; 

Penalty  (c)  If  any  of  the  corporations,  joint-stock  companies  or  asso- 

Refusal  to  ciations,  or  insurance  companies  aforesaid  shall  refuse  or  neglect 
to  make  a  return  at  the  time  or  times  hereinbefore  specified  in 
each  year,  or  shall  render  a  false  or  fraudulent  return,  such 
corporation,  joint-stock  company  or  association,  or  insurance 
company  shall  be  liable  to  a  penalty  of  not  exceeding  $10,000; 
Provided,  That  the  Commissioner  of  Internal  Revenue  shall  have 
authority,  in  the  case  of  either  corporations  or  individuals,  to 
grant  a  reasonable  extension  of  time  in  meritorious  cases,  as  he 
may  deem  proper. 

(d)  That  section  thirty-two  hundred  and  twenty-five  of  the 
Revised  Statutes  of  the  United  States  be,  and  the  same  is  hereby, 
amended  so  as  to  read  as  follows : 

Second  "  SEC.  3225.  When  a  second  assessment  is  made  in  case  of  any 

Assessment  list,  statement,  or  return,  which  in  the  opinion  of  the  collector 
or  deputy  collector  was  false  or  fraudulent,  or  contained  any 
understatement  or  undervaluation,  no  tax  collected  under  such 
assessment  shall  be  recovered  by  any  suit  unless  it  is  proved  that 
the  said  list,  statement,  or  return  was  not  false  nor  fraudulent 
and  did  not  contain  any  understatement  or  undervaluation;  but 
this  section  shall  not  apply  to  statements  or  returns  made  or 
to  be  made  in  good  faith  under  the  laws  of  the  United  States, 
regarding  annual  depreciation  of  oil  or  gas  wells  and  mines." 


"State" 
"United 
States" 
Defined 


Disclosing 

Information 

Prohibited 


PART  III. — GENERAL  ADMINISTRATIVE  PROVISIONS. 

SEC.  15.  That  the  word  "State"  or  "United  States"  when 
used  in  this  title  shall  be  construed  to  include  any  Territory,  the 
District  of  Columbia,  Porto  Rico,  and  the  Philippine  Islands, 
when  such  construction  is  necessary  to  carry  out  its  provisions. 

SEC.  16.  That  sections  thirty-one  hundred  and  sixty-seven, 
thirty-one  hundred  and  seventy-two,  thirty-one  hundred  and 
seventy-three,  and  thirty-one  hundred  and  seventy-six  of  the 
Revised  Statutes  of  the  United  States  as  amended  are  hereby 
amended  so  as  to  read  as  follows: 

"  SEC.  3167.  It  shall  be  unlawful  for  any  collector,  deputy  col- 
lector, agent,  clerk,  or  other  officer  or  employee  of  the  United 
States  to  divulge  or  to  make  known  in  any  manner  whatever 


FEDERAL   INCOME  TAX   LAW  155 

not  provided  by  law  to  any  person  the  operations,  style  of  work, 
or  apparatus  of  any  manufacturer  or  producer  visited  by  him 
in  the  discharge  of  his  official  duties,  or  the  amount  or  source 
of  income,  profits,  losses,  expenditures,  or  any  particular  thereof, 
set  forth  or  disclosed  in  any  income  return,  or  to  permit  any 
income  return  or  copy  thereof  or  any  book  containing  any 
abstract  or  particulars  thereof  to  be  seen  or  examined  by  any 
person  except  as  provided  by  law ;  and  it  shall  be  unlawful  for 
any  person  to  print  or  publish  in  any  manner  whatever  not  pro- 
vided by  law  any  income  return  or  any  part  thereof  or  source 
of  income,  profits,  losses,  or  expenditures  appearing  in  any  in- 
come return;  and  any  offense  against  the  foregoing  provision 
shall  be  a  misdemeanor  and  be  punished  by  a  fine  not  exceeding 
$1,000  or  by  imprisonment  not  exceeding  one  year,  or  both,  at 
the  discretion  of  the  court;  and  if  the  offender  be  an  officer 
or  employee  of  the  United  States  he  shall  be  dismissed  from 
office  or  discharged  from  employment. 

"SEC.  3172.  Every. collector  shall,  from  time  to  time,  cause  his 
deputies  to  proceed  through  every  part  of  his  district  and  inquire 
.  after  and  concerning  all  persons  therein  who  are  liable  to  pay 
any  internal-revenue  tax,  and  all  persons  owning  or  having 
the  care  and  management  of  any  objects  liable  to  pay  any  tax, 
and  to  make  a  list  of  such  persons  and  enumerate  said  objects. 

Provisions  of  "SEC.  3173.  It  shall  be  the  duty  of  any  person,  partnership, 
Administra-  firm,  association,  or  corporation,  made  liable  to  any  duty,  special 
tax,  or  other  tax  imposed  by  law,  when  not  otherwise  provided 
for,  (1)  in  case  of  a  special  tax,  on  or  before  the  thirty-first 
day  of  July  in  each  year,  (2)  in  case  of  income  tax  on  or  before 
the  first  day  of  March  in  each  year,  or  on  or  before  the  last 
day  of  the  sixty-day  period  next  following  the  closing  date  of 
the  fiscal  year  for  which  it  makes  a  return  of  its  income,  and 
(3)  in  other  cases  before  the  day  on  which  the  taxes  accrue,  to 
,  make  a  list  or  return,  verified  by  oath,  to  the  collector  or  a 
deputy  collector  of  the  district  where  located,  of  the  articles 
or  objects,  including  the  amount  of  annual  income  charged  with 
a  duty  or  tax,  the  quantity  of  goods,  wares,  and  merchandise, 
made  or  sold  and  charged  with  a  tax,  the  several  rates  and 
aggregate  amount,  according  to  the  forms  and  regulations  to 
be  prescribed  by  the  Commissioner  of  Internal  Revenue,  with 
the  approval  of  the  Secretary  of  the  Treasury,  for  which  such 
person,  partnership,  firm,  association,  or  corporation  is  liable: 
Provided,  That  if  any  person  liable  to  pay  any  duty  or  tax,  or 
owning,  possessing,  or  having  the  care  or  management  of  prop- 
erty, goods,  wares,  and  merchandise,  article  or  objects  liable 


156  APPENDIX   A 

to  pay  any  duty,  tax,  or  license,  shall  fail  to  make  and  exhibit 
a  list  or  return  required  by  law,  but  shall  consent  to  disclose 
the  particulars  of  any  and  all  the  property,  goods,  wares,  and 
merchandise,  articles,  and  objects  liable  to  pay  any  duty  or  tax, 
or  any  business  or  occupation  liable  to  pay  any  tax  as  aforesaid, 
then,  and  in  that  case,  it  shall  be  the  duty  of  the  collector 
or  deputy  collector  to  make  such  list  or  return,  which,  being 
distinctly  read,  consented  to,  and  signed  and  verified  by  oath 
by  the  person  so  owning,  possessing,  or  having  the  care  and 
management  as  aforesaid,  may  be  received  as  the  list  of  such 
person :  Provided  further,  That  in  case  no  annual  list  or  return 
has  been  rendered  by  such  person  to  the  collector  or  deputy 
collector  as  required  by  law,  and  the  person  shall  be  absent 
from  his  or  her  residence  or  place  of  business  at  the  time  the 
collector  or  a  deputy  collector  shall  call  for  the  annual  list 
or  return,  it  shall  be  the  duty  of  such  collector  or  deputy  col- 
lector to  leave  at  such  place  of  residence  or  business,  with  some 
one  of  suitable  age  and  discretion,  if  such  be  present,  other- 
wise to  deposit  in  the  nearest  post  office,  a  note  or  memorandum 
addressed  to  such  person,  requiring  him  or  her  to  render  to 
such  collector  or  deputy  collector  the  list  or  return  required 
by  law  within  ten  days  from  the  date  of  such  note  or  memor- 
andum, verified  by  oath.  And  if  any  person,  on  being  notified 
or  required  as  aforesaid,  shall  refuse  or  neglect  to  render  such 
list  or  return  within  the  time  required  as  aforesaid,  or  when- 
ever any  person  who  is  required  to  deliver  a  monthly  or  other 
return  of  objects  subject  to  tax  fails  to  do  so  at  the  time 
required,  or  delivers  any  return  which,  in  the  opinion  of  the 
collector,  is  erroneous,  false,  or  fraudulent,  or  contains  any 
undervaluation  or  understatement,  or  refuses  to  allow  any 
regularly  authorized  Government  officer  to  examine  the  books 
of  such  person,  firm,  or  corporation,  it  shall  be  lawful  for  the 
collector  to  summon  such  person,  or  any  other  person  having 
possession,  custody,  or  care  of  books  of  account  containing 
entries  relating  to  the  business  of  such  person,  or  any  other 
person  he  may  deem  proper,  to  appear  before  him  and  produce 
such  books  at  a  time  and  place  named  in  the  summons,  and 
to  give  testimony  or  answer  interrogatories,  under  oath,  re- 
specting any  objects  or  income  liable  to  tax  or  the  returns 
thereof.  The  collector  may  summon  any  person  residing  or 
found  within  the  State  or  Territory  in  which  his  district  lies; 
and  when  the  person  intended  to  be  summoned  does  not  reside 
and  can  not  be  found  within  such  State  or  Territory,  he  may 
enter  any  collection  district  where  such  person  may  be  found 


FEDERAL   INCOME   TAX   LAW 


157 


and  there  make  the  examination  herein  authorized.  And  to  this 
end  he  may  there  exercise  all  the  authority  which  he  might 
lawfully  exercise  in  the  district  for  which  he  was  commissioned  ; 
Provided,  That  '  person,'  as  used  in  this  section,  shall  be  con- 
strued to  include  any  corporation,  joint-stock  company  or  asso- 
ciation, or  insurance  company  when  such  construction  is  neces- 
sary to  carry  out  its  provisions. 

"  SEC.  3176.  If  any  person,  corporation,  company,  or  associa- 
jollector          tion  fails  to  make  and  file  a  return  or  list  at  the  time  prescribed 
ay  Prepare  bv  jaw>  or  makes,  willfully  or  otherwise,  a  false  or  fraudulent 
return  or  list,  the  collector  or  deputy  collector  shall  make  the 
return  or  list  from  his  own  knowledge  and  from  such  informa- 
tion  as   he   can   obtain   through   testimony   or   otherwise.    Any 
return  or  list  so  made  and  subscribed  by  a  collector  or  deputy 
collector  shall  be  prima  facie  good  and  sufficient  for  all  legal 
purposes. 


eturn 


^au<ure  to 


a  return  or  list  is  due  to  sickness  or 


xtension  of 

me  absence  the  collector  may  allow  such  further  time,  not  exceeding 

thirty  days,  for  making  and  filing  the  return  or  list  as  he  deems 
proper. 

enalties  for  "  The  Commissioner  of  Internal  Revenue  shall  assess  all  taxes, 
allure  to  other  than  stamp  taxes,  as  to  which  returns  or  lists  are  so  made 
lie  Returns  by  a  collector  or  deputy  collector.  In  case  of  any  failure  to 
make  and  file  a  return  or  list  within  the  time  prescribed  by 
law  or  by  the  collector,  the  Commissioner  of  Internal  Revenue 
shall  add  to  the  tax  fifty  per  centum  of  its  amount  except  that, 
when  a  return  is  voluntarily  and  without  notice  from  the  col- 
lector filed  after  such  time  and  it  is  shown  that  the  failure  to 
file  it  was  due  to  a  reasonable  cause  and  not  to  willful  neglect, 
no  such  addition  shall  be  made  to  the  tax.  In  case  a  false  or 
fraudulent  return  or  list  is  willfully  made,  the  Commissioner 
of  Internal  Revenue  shall  add  to  the  tax  one  hundred  per  centum 
of  its  amount. 

"  The  amount  so  added  to  any  tax  shall  be  collected  at  the 
same  time  and  in  the  same  manner  and  as  part  of  the  tax 
unless  the  tax  has  been  paid  before  the  discovery  of  the  neglect, 
falsity,  or  fraud,  in  which  case  the  amount  so  added  shall  be 
collected  in  the  same  manner  as  the  tax." 

eceipt  for          SEC.  17.  That  it  shall  be  the  duty  of  every  collector  of  internal 

ayment  of     revenue,  to  v/hom  any  payment  of  any  taxes  is  made  under  the 

provisions  of  this  title,  to  give  to  the  person  making  such  pay- 

ment a  full  written  or  printed  receipt,  expressing  the  amount 


158 


APPENDIX   A 


Penalties 


Returns 
Verified  by 
Oath 


paid  and  the  particular  account  for  which  such  payment  was 
made;  and  whenever  such  payment  is  made  such  collector  shall, 
if  required,  give  a  separate  receipt  for  each  tax  paid  by  any 
debtor,  on  account  of  payments  made  to  or  to  be  made  by 
him  to  separate  creditors  in  such  form  that  such  debtor  can 
conveniently  produce  the  same  separately  to  his  several  credi- 
tors in  satisfaction  of  their  respective  demands  to  the  amounts 
specified  in  such  receipts;  and  such  receipts  shall  be  sufficient 
evidence  in  favor  of  such  debtor  to  justify  him  in  withholding 
the  amount  therein  expressed  from  his  next  payment  to  his 
creditor;  but  such  creditor  may,  upon  giving  to  his  debtor 
a  full  written  receipt,  acknowledging  the  payment  to  him  of 
whatever  sum  may  be  actually  paid,  and  accepting  the  amount 
of  tax  paid  as  aforesaid  (specifying  the  same)  as  a  further 
satisfaction  of  the  debt  to  that  amount,  require  the  surrender 
to  him  of  such  collector's  receipt. 

SEC.  18.  That  if  any  individual  liable  to  make  the  return  or 
pay  the  tax  aforesaid  shall  refuse  or  neglect  to  make  such 
return  at  the  time  or  times  hereinbefore  specified  in  each  year, 
he  shall  be  liable  to  a  penalty  of  not  less  than  $20  nor  more 
than  $1,000.  Any  individual  or  any  officer  of  any  corporation, 
joint-stock  company  or  association,  or  insurance  company  re- 
quired by  law  to  make,  render,  sign,  or  verify  any  return  who 
makes  any  false  or  Fraudulent  return  or  statement  with  intent 
to  defeat  or  evade  the  assessment  required  by  this  title  to  be 
made  shall  be  guilty  of  a  misdemeanor,  and  shall  be  fined  not 
exceeding  $2,000  or  be  imprisoned  not  exceeding  one  year,  or 
both,  in  the  discretion  of  the  court,  with  the  costs  of  prosecu- 
tion ;  Provided,  That  where  any  tax  heretofore  due  and  payable 
has  been  duly  paid  by  the  taxpayer,  it  shall  not  be  re-collected 
from  any  person  or  corporation  required  to  retain  it  at  its 
source,  nor  shall  any  penalty  be  imposed  or  collected  in  such 
cases  from  the  taxpayer,  or  such  person  or  corporation  whose 
duty  it  was  to  retain  it,  for  failure  to  return  or  pay  the  same, 
unless  such  failure  was  fraudulent  and  for  the  purpose  of  evad- 
ing payment. 

SEC.  19.  The  collector  or  deputy  collector  shall  require  every 
return  to  be  verified  by  the  oath  of  the  party  rendering  it.  If 
the  collector  or  deputy  collector  have  reason  to  believe  that 
the  amount  of  any  income  returned  is  understated,  he  shall 
give  due  notice  to  the  person  making  the  return  to  show  cause 
why  the  amount  of  the  return  should  not  be  increased,  and  upon 
proof  of  the  amount  understated  may  increase  the  same  accord- 
ingly. Such  person  may  furnish  sworn  testimony  to  prove  any 


FEDERAL   INCOME   TAX   LAW 


159 


relevant  facts,  and,  if  dissatisfied  with  the  decision  of  the 
collector,  may  appeal  to  the  Commissioner  of  Internal  Revenue 
for  his  decision  under  such  rules  of  procedure  as  may  be  pre- 
scribed by  regulation. 

SEC.  20.  That  jurisdiction  is  hereby  conferred  upon  the  district 
courts  of  the  United  States  for  the  district  within  which  any 
person  summoned  under  this  title  to  appear  to  testify  or  to 
produce  books  shall  reside,  to  compel  such  attendance,  produc- 
tion of  books,  and  testimony  by  appropriate  process. 

SEC.  21.  That  the  preparation  and  publication  of  statistics 
reasonably  available  with  respect  to  the  operation  of  the  income 
tax  law  and  containing  classifications  of  taxpayers  and  of  income, 
the  amounts  allowed  as  deductions  and  exemptions,  and  any 
other  facts  deemed  pertinent  and  valuable,  shall  be  made  annu- 
ally by  the  Commissioner  of  Internal  Revenue  with  the  approval 
of  the  Secretary  of  the  Treasury. 

SEC.  22.  That  all  administrative,  special,  and  general  provisions 
of  law,  including  the  laws  in  relation  to  the  assessment,  remis- 
sion, collection,  and  refund  of  internal-revenue  taxes  not  hereto- 
fore specifically  repealed  and  not  inconsistent  with  the  provisions 
of  this  title,  are  hereby  extended  and  made  applicable  to  all  the 
provisions  of  this  title  and  to  the  tax  herein  imposed. 

SEC.  23.  That  the  provisions  of  this  title  shall  extend  to  Porto 
Rico  and  the  Philippine  Islands,"  Provided,  That  the  adminis- 
tration of  the  law  and  the  collection  of  the  taxes  imposed  in 
Porto  Rico  and  the  Philippine  Islands  shall  be  by  the  appro- 
priate internal-revenue  officers  of  those  governments,  and  all 
revenues  collected  in  Porto  Rico  and  the  Philippine  Islands 
thereunder  shall  accrue  intact  to  the  general  Governments 
thereof,  respectively;  Provided  further,  That  the  jurisdiction 
in  this  title  conferred  upon  the  district  courts  of  the  United 
States  shall,  so  far  as  the  Philippine  Islands  are  concerned,  be 
vested  in  the  courts  of  the  first  instance  of  said  islands;  And 
provided  further,  That  nothing  in  this  title  shall  be  held  to  ex- 
clude from  the  computation  of  the  net  income  the  compensa- 
tion paid  any  official  by  the  governments  of  the  District  of 
Columbia,  Porto  Rico,  and  the  Philippine  Islands,  or  the  political 
subdivisions  thereof. 

Repeal  of  SEC.  24.  That  Section  II  of  the  Act  approved  October  third, 

Income  Tax     nineteen  hundred  and  thirteen,  entitled  "  An  Act  to  reduce  tariff 

Act  of  1913      duties   and  to   provide   revenue   for   the   Government,   and   for 

other  purposes,"  is  hereby  repealed,  except  as  herein  otherwise 


160  APPENDIX   A 

provided,  and  except  that  it  shall  remain  in  force  for  the 
assessment  and  collection  of  all  taxes  which  have  accrued  there- 
under, and  for  the  imposition  and  collection  of  all  penalties  or 
forfeitures  which  have  accrued  or  may  accrue  in  relation  to  any 
of  such  taxes,  and  except  that  the  unexpended  balance  of  any 
appropriation  heretofore  made  and  now  available  for  the  adminis- 
tration of  such  section  or  any  provision  thereof  shall  be  avail- 
able for  the  administration  of  this  title  or  the  corresponding 
provision  thereof. 

SEC.  25.  That  income  on  which  has  been  assessed  the  tax 
imposed  by  Section  II  of  the  Act  entitled  "  An  Act  to  reduce 
tariff  duties  and  to  provide  revenue  for  the  Government,  and 
for  other  purposes,*'  approved  October  third,  nineteen  hundred 
and  thirteen,  shall  not  be  considered  as  income  within  the  mean- 
ing of  this  title;  Provided,  That  this  section  shall  not  conflict 
with  that  portion  of  section  ten,  of  this  title,  under  which  a  tax- 
payer has  fixed  its  own  fiscal  year. 


161 


APPENDIX  B 

FEDERAL  CORPORATION  CAPITAL  STOCK 
TAX  LAW 

ENACTED  SEPTEMBER  8,  1916 

SECTION  407.  That  on  and  after  January  first,  nineteen  hun- 
dred and  seventeen,  special  taxes  shall  be,  and  hereby  are,  im- 
posed annually,  as  follows,  that  is  to  say: 

Every  corporation,  joint-stock  company  or  association,  now  or 
hereafter  organized  in  the  United  States  for  profit  and  having 
a  capital  stock  represented  by  shares,  and  every  insurance  com- 
pany, now  or  hereafter  organized  under  the  laws  of  the  United 
States,  or  any  State  or  Territory  of  the  United  States,  shall  pay 
annually  a  special  excise  tax  with  respect  to  the  carrying  on  or 
doing  business  by  such  corporation,  joint-stock  company  or  asso- 
ciation, or  insurance  company,  equivalent  to  50  cents  for  each 
$1,000  of  the  fair  value  of  its  capital  stock  and  in  estimating  the 
value  of  capital  stock  the  surplus  and  undivided  profits  shall 
be  included :  Provided,  That  in  the  case  of  insurance  companies 
such  deposits  and  reserve  funds  as  they  are  required  by  law  or 
contract  to  maintain  or  hold  for  the  protection  of  or  payment 
to  or  apportionment  among  policyholders  shall  not  be  included. 
The  amount  of  such  annual  tax  shall  in  all  cases  be  computed 
on  the  basis  of  the  fair  average  value  of  the  capital  stock  for 
the  preceding  year :  Provided,  That  for  the  purpose  of  this  tax 
an  exemption  of  $99,000  shall  be  allowed  from  the  capital  stock 
as  defined  in  this  paragraph  of  each  corporation,  joint-stock 
company  or  association,  or  insurance  company :  Provided  fur- 
ther, That  a  corporation,  joint-stock  company  or  association,  or 
insurance  company,  actually  paying  the  tax  imposed  by  section 
three  hundred  and  one  of  Title  III  of  this  act  shall  be  entitled 
to  a  credit  as  against  the  tax  imposed  by  this  paragraph  equal 
to  the  amount  of  the  tax  so  actually  paid :  And  provided  fur- 
ther, That  this  tax  shall  not  be  imposed  upon  any  corporation, 
joint-stock  company  or  association,  or  insurance  company  not 
engaged  in  business  during  the  preceding  taxable  year,  or  which 
is  exempt  under  the  provisions  of  section  eleven,  Title  I,  of  this 
act. 

Every  corporation,  joint-stock  company  or  association,  or  in- 
surance company,  now  or  hereafter  organized  for  profit  under 
the  laws  of  any  foreign  country  and  engaged  in  business  in  the 
United  States  shall  pay  annually  a  special  excise  tax  with  respect 


162  APPENDIX   B 

to  the  carrying  on  or  doing  business  in  the  United  States  by 
such  corporation,  joint-stock  company  or  association,  or  insur- 
ance company,  equivalent  to  50  cents  for  each  $1,000  of  the 
capital  actually  invested  in  the  transaction  of  its  business  in  the 
United  States :  Provided,  That  in  the  case  of  insurance  com- 
panies such  deposits  or  reserve  funds  as  they  are  required  by 
law  or  contract  to  maintain  or  hold  in  the  United  States  for  the 
protection  of  or  payment  to  or  apportionment  among  policyhold- 
ers,  shall  not  be  included.  The  amount  of  such  annual  tax  shall 
in  all  cases  be  computed  on  the  basis  of  the  average  amount  of 
capital  so  invested  during  the  preceding  year:  Provided,  That 
for  the  purpose  of  this  tax  an  exemption  from  the  amount  of 
capital  so  invested  shall  be  allowed  equal  to  such  proportion  of 
$99,000  as  the  amount  so  invested  bears  to  the  total  amount  in- 
vested in  the  transaction  of  business  in  the  United  States  or  else- 
where :  Provided,  further,  That  this  exemption  shall  be  allowed 
only  if  such  corporation,  joint-stock  company  or  association,  or 
insurance  company  makes  return  to  the  Commissioner  of  In- 
ternal Revenue,  under  regulations  prescribed  by  him,  with  the 
approval  of  the  Secretary  of  the  Treasury,  of  the  amount  of 
capital  invested  in  the  transaction  of  business  outside  the  United 
States:  And  provided  further,  That  a  corporation,  joint-stock 
company  or  association,  or  insurance  company  actually  paying 
the  tax  imposed  by  section  three  hundred  and  one  of  Title  III 
of  this  act,  shall  be  entitled  to  a  credit  as  against  the  tax  im- 
posed by  this  paragraph  equal  to  the  amount  of  the  tax  so  actu- 
ally paid :  And  provided  further,  That  this  tax  shall  not  be  im- 
posed upon  any  corporation,  joint-stock  company  or  association, 
or  insurance  company  not  engaged  in  business  during  the  preced- 
ing taxable  year,  or  which  is  exempt  under  the  provisions  of 
section  eleven,  Title  I,  of  this  act. 

SEC.  408.  (Last  paragraph.)  Every  person  who  carries  on 
any  business  or  occupation  for  which  special  taxes  are  imposed 
by  this  title,  without  having  paid  the  special  tax  therein  provided, 
shall,  besides  being  liable  to  the  payment  of  such  special  tax,  be 
deemed  guilty  of  a  misdemeanor,  and  upon  conviction  thereof 
shall  pay  a  fine  of  not  more  than  $500,  or  be  imprisoned  not  more 
than  six  months,  or  both,  in  the  discretion  of  the  court. 

SEC.  409.  That  all  administrative  or  special  provisions  of  law, 
including  the  law  relating  to  the  assessment  of  taxes,  so  far  as 
applicable,  are  hereby  extended  to  and  made  a  part  of  this  title, 
and  every  person,  firm,  company,  corporation,  or  association  liable 
to  any  tax  imposed  by  this  title,  shall  keep  such  records  and 
render,  under  oath,  such  statements  and  returns,  and  shall  com- 
ply with  such  regulations  as  the  Commissioner  of  Internal  Rev- 


CAPITAL  STOCK  ,  TAX   REGULATIONS  163 

enue,  with  the  approval  of  the  Secretary  of  the  Treasury,  may 
from  time  to  time  prescribe. 

REGULATIONS. 

Concerning  the  special  excise  tax  imposed  by  section  407,  Title 
IV,  act  of  September  8,  1916,  on  corporations,  joint-stock 
companies  or  associations,  and  insurance  companies,  orga- 
nized for  profit  in  the  United  States,  and  on  the  capital  in- 
vested in  the  United  States  of  foreign  companies  and  asso- 
ciations transacting  business  in  the  United  States. 

RETURNS     COMPUTATION   OF  TAX,   COLLECTIONS,   AND   PENALTIES. 

Tax  imposed. 

Article  1.  Section  407  imposes  a  special  excise  tax  with 
respect  to  the  carrying  on  or  doing  business  by  corporations, 
joint-stock  companies  or  associations,  or  insurance  companies, 
as  follows: 

Corporations  in  the  United  States. 

(a)  Every  corporation,  joint-stock  company  or  association,  or 
insurance  company,  now  or  hereafter  organized  in  the  United 
States    for   profit   and   having   a   capital    stock   represented   by 
shares,  50  cents  for  each  $1,000  of  the  fair  value  of  the  capital 
stock  in  excess  of  $99,000,  except  as  hereinafter  indicated;  and 

Foreign  corporations. 

(b)  Every   corporation,   joint-istock   company   or   association, 
or  insurance  company,  now  or  hereafter  organized   for  profit 
under  the  laws  of  any  foreign  country  and  engaged  in  business 
in  the  United  States,  50  cents   for  each  $1,000  of  the  capital 
actually  invested  in  the  transaction  of  its  business  in  the  United 
States.    It  is  provided  in  cases  in  which  the  foreign  corporation 
makes  a  return  of  the  total  amount  of  capital  invested  in  the 
transaction  of  business,  both  abroad  and  in  this  country,  that 
such  proportion  of  $99,000  as  the  amount  invested  in  the  United 
States  bears  to  the  total  amount  invested  in  the  United  States 
and  elsewhere  may  be  remitted  in  computing  the  tax  upon  the 
capital  invested  in  the  United   States. 

Corporations  Exempt. 
Corporations  and  associations  exempt. 

Art.  2.  (a)  The  following  corporations,  joint-stock  com- 
panies or  associations,  or  insurance  companies,  which  aire 
exempt  from  income  tax  under  the  provisions  of  section  11, 


164  APPENDIX   B 

Title  I,  are  also  specifically  exempt  from  the  capital-stock  tax 
under  section  407,  Title  IV,  of  this  act: 

First.    Labor,  agricultural,  or  horticultural  organization; 

Second.  Mutual  savings  bank  not  having  a  capital  stock 
represented  by  shares; 

Third.  Fraternal  beneficiary  society,  order,  or  association, 
operating  under  the  lodge  system  or  for  the  exclusive  benefit 
of  the  members  of  a  fraternity  itself  operating  under  the  lodge 
system,  and  providing  for  the  payment  of  life,  sick,  accident, 
or  other  benefits  to  the  members  of  such  society,  order,  or  asso- 
ciation, or  their  dependents; 

Fourth.  Domestic  building  and  loan  association  and  coopera- 
tive banks  without  capital  stock  organized  and  operated  for 
mutual  purposes  and  without  profit; 

Fifth.  Cemetery  company  owned  and  operated  exclusively 
for  the  benefit  of  its  members; 

Sixth.  Corporation  or  association  organized  and  operated  ex- 
clusively for  religious,  charitable,  scientific,  or  educational  pur- 
poses, no  part  of  the  net  income  of  which  inures  to  the  benefit 
of  any  private  stockholder  or  individual; 

Seventh.  Business  league,  chamber  of  commerce,  or  board 
of  trade,  not  organized  for  profit  and  no  part  of  the  net  income 
of  which  inures  to  the  benefit  of  any  private  stockholder  or 
individual ; 

Eighth.  Civic  league  or  organization  not  organized  for  profit 
but  operated  exclusively  for  the  promotion  of  social  welfare ; 

Ninth.  Club  organized  and  operated  exclusively  for  pleasure, 
recreation,  and  other  nonprofitable  purposes,  no  part  of  the  net 
income  of  which  inures  to  the  benefit  of  any  private  stock- 
holder or  member; 

Tenth.  Farmers'  or  other  mutual  hail,  cyclone,  or  fire  in- 
surance company,  mutual  ditch  or  irrigation  company,  mutual 
or  cooperative  telephone  company,  or  like  organization  of  a 
purely  local  character,  the  income  of  which  consists  isolely  of 
assessments,  dues,  and  fees  collected  from  members  for  the 
sole  purpose  of  meeting  its  expenses; 

Eleventh.  Farmers',  fruit  growers',  or  like  association,  or- 
ganized and  operated  as  a  sales  agent  for  the  purpose  of  mar- 
keting the  products  of  its  members  and  turning  back  to  them 
the  proceeds  of  sales,  less  the  necessary  selling  expenses,  on 
the  basis  of  the  quantity  of  produce  furnished  by  them; 

Twelfth.  Corporation  or  association  organized  for  the  ex- 
clusive purpose  of  holding  title  to  property,  collecting  income 
therefrom,  and  turning  over  the  entire  amount  thereof,  less 


CAPITAL   STOCK   TAX   REGULATIONS  165 

expenses,  to  an  organization  which  itself  is  exempt  from  the 
tax  imposed  by  this  title;  or 

Thirteenth.  Federal  land  banks  and  national  farm-loan  asso- 
ciations as  provided  in  section  twenty-six  of  the  act  approved 
July  seventeenth,  nineteen  hundred  and  sixteen,  entitled  "  An 
act  to  provide  capital  for  agricultural  development,  to  create 
standard  forms  of  investment  based  upon  farm  mortgage,  to 
equalize  rates  of  interest  upon  farm  loans,  to  furnish  a  market 
for  United  States  bonds,  to  create  Government  depositaries  and 
financial  agents  for  the  United  States,  and  for  other  purposes." 

Mutual  companies  exempt. 

(b)  Inasmuch  as  the  basis  of  tax  is  the  fair  value  of  the 
stock  of  a  corporation,  mutual  insurance  companies  and  other 
associations  not  having  capital  stock  represented  by  shares  will 
also  be  exempt  from  tax,  in  the  absence  of  a  basis  for  the  com- 
putation of  the  tax. 

Returns. 
Tax  due  in  January  and  July,  1917,  and  annually  in  July 

thereafter. 

Art.  3.  (a)  Section  3237,  Revised  Statutes,  as  amended  by 
section  53  of  the  act  of  October  1,  1890  (26  Stats.,  567),  pro- 
vides "that  all  special  taxes  shall  become  due  on  the  1st  day 
of  July,  1891,  and  on  the  1st  day  of  July  in  each  year  there- 
after, or  on  commencing  any  trade  or  business  on  which  such 
tax  is  imposed.  In  the  former  case  the  tax  shall  be  reckoned 
for  one  year,  and  in  the  latter  case  it  shall  be  reckoned  pro- 
portionately from  the  1st  day  of  the  month  in  which  the  lia- 
bility to  a  special  tax  commenced  to  the  1st  day  of  July  fol- 
lowing." The  capital-stock  tax,  therefore,  which  becomes 
effective  January  1,  1917,  will  be  payable  in  January,  1917,  on 
returns  to  be  made  during  that  month  for  the  six  months 
ending  June  30,  1917.  In  July,  1917,  and  annually  in  July  there- 
after, returns  must  again  be  made  and  the  tax  paid  for  the 
ensuing  fiscal  year. 

Returns   required   of    every   United    States   corporation   having 
capital  stock  outstanding  of  $75,000  or  over. 

(b)  Every  corporation,  joint-stock  company  or  association, 
or  insurance  company,  organized  in  the  United  States  for  profit 
and  having  a  capital  stock  issued  and  outstanding,  represented 
by  shares  of  the  market  value  of  $75,000  or  over,  and  not 
exempt  as  indicated  in  article  2,  shall  make  a  return  on  Form 


166  APPENDIX   B 

707  irrespective  of  the  par  value  of  its  capital  stock,  unless 
such  corporation,  joint-stock  company  or  association,  or  in- 
surance company  was  not  engaged  in  business  during  the  pre- 
ceding taxable  year,  which  for  the  return  due  January  1,  1917, 
shall  be  the  fiscal  year  July  1,  1915,  to  June  30,  1916. 

Return  required  of  every  foreign  corporation. 

(c)  Every  corporation,  joint-stock  company  or  association,  or 
insurance  company,  organized  for  profit  under  the  laws  of  any 
foreign  country  and  engaged  in  business  in  the  United  States, 
shall  make  return  on  Form  708  irrespective  of  the  amount  of 
capital  employed  either  at  home  or  in  this  country  in  the  trans- 
action of  its  business. 

Form  of  return  for  United  States  corporations. 
Substance  of  return  required  from  United  States  Corporations. 
Art.  4.  The  return  required  by  article  3  of  corporations, 
joint-stock  companies  or  associations,  or  insurance  companies, 
organized  in  the  United  States,  shall  be  made  on  Form  707,  to 
be  supplied  by  this  department,  and  shall  set  forth  the  following 
particulars : 

(1)  Total  number  of  shares  of  stock  now  outstanding. 

(2)  Par  value  of  shares. 

(3)  Par  value  of  total  capital  stock  outstanding. 

(4)  Amount  of  surplus. 

(5)  Amount  of  undivided  profits. 

(6)  Case  I. — Average  market  value  per  share  during  preceding 
fiscal  year,  if  stock  is  listed  on  an  exchange. 

Case  II. — If  stock  is  not  listed  on  an  exchange,  average 
market  value  per  share  computed  from  sales  made  during  pre- 
ceding fiscal  year. 

Case  III. — If  stock  is  not  listed  on  any  exchange  and  no  sales 
have  been  made  during  preceding  fiscal  year,  or  if  sales  have 
been  made  and  the  price  is  unknown,  the  fair  average  value 
of  the  stock  may  be  estimated  from  the  following  data  set 
forth  on  the  return:  Amount  of  surplus,  amount  of  undivided 
profits,  nature  of  business,  estimated  earning  capacity,  average 
dividends  per  share  paid  during  preceding  five  years,  average 
profits  per  share  earned  during  preceding  five  years. 

(7)  Total  number  of  shares  of  stock  outstanding  on  last  day 
of  fiscal  year. 

(8)  Fair  value  of  total  capital  stock  for  preceding  fiscal  year. 

(9)  Deduction  allowed  by  law  of  $99,000. 


CAPITAL  STOCK   TAX   REGULATIONS  167 

(10)  Amount  of  fair  value  of  stock  over  $99,000  upon  which 
tax  should  be  computed. 

(11)  Tax  at  rate  of  SO  cents  per  year  for  each  full  $1,000. 

(12)  Amount  of  munitions  tax,  if  any,  paid  under  Title  III 
of  this  act  since  making  the  last  previous  return. 

(13)  Amount  of  tax  due. 

Form  of  return  for  foreign  corporations, 
Substance  of  return  required  of  foreign  corporations. 
Art,  5.  The  return  required  by  article  3  of  foreign  corpora- 
tions, joint-stock  companies  or  associations,  or  insurance  com- 
panies, having  capital  invested  in  the  transaction  of  its  business 
in  the  United  States,  shall  be  made  on  Form  708,  to  be  supplied 
by  this  department,  and  shall  set  forth  the  following  particulars : 

(1)  Amount  of  capital  invested  in  the  United  States. 

(2)  Amount  of  capital  invested  in  foreign  countries. 

(3)  Total  amount  of  capital  invested  in  the  corporation,  both 
in  the  United  States  and  elsewhere. 

(4)  Percentage  of  capital  invested  in  the  United  States. 

(5)  Percentage  of  $99,000  allowed  to  be  deducted  under  the 
law. 

(6)  Amount  of  capital  upon  which  tax  should  be  computed. 

(7)  Tax  at  the  rate  of  50  cents  per  year  for  each  full  $1,000. 

(8)  Amount  of  munitions  tax,  if  any,  paid  under  Title  III 
of  this  act  since  making  the  last  previous  return. 

(9)  Amount  of  tax  due. 

Computation  of  Tax. 
United  States  corporations. 

Art.  6.  Sec.  1.  Companies  or  associations  organised  in  the 
United  States  for  profit. — The  tax  on  companies  or  associations 
having  a  capital  stock  represented  by  shares  is  imposed  on  the 
fair  average  value  for  the  preceding  year  and  not  the  face  or 
par  value  of  the  capital  stock.  The  fair  value  of  the  capital 
stock  shall  be  ascertained  as  follows: 

Stock  listed  on  exchange. 

(a)  Case  /.—If  the  stock  is  listed  on  any  exchange  its  fair 
value  will  be  determined  by  adding  the  quoted  highest  bid  price 
for  the  stock  on  the  last  business  day  of  each  month  during  the 
preceding  fiscal  year  (or  if  no  bid  price  was  quoted  on  the  last 
day  then  the  latest  day  in  the  month  on  which  a  bid  was  quoted), 
and  dividing  by  12,  the  result  being  the  average  bid  price  per 
share  for  that  year. 


168  APPENDIX    B 

Stock  not  listed,  but  of  which  sales  have  been  made. 

(6)  Case  II. — If  the  stock  is  not  listed  on  any  exchange,  but 
sales  thereof  have  been  actually  made,  and  the  price  paid  for 
the  stock  is  known  to  the  officer  making  the  return,  or  can  be 
discovered  by  him,  the  average  price  at  which  sales  were  made 
during  the  preceding  fiscal  year  shall  be  the  determining  factor 
in  ascertaining  the  fair  value  per  share. 

(In  the  foregoing  two  cases  the  actual  fair  value  of  the  stock 
is  ascertainable  from  the  facts  without  the  necessity  of  making 
an  estimate.) 

Cases  in  which  fair  average  value  of  stock  shall  be  estimated. 

(c)  Case  III. — If  Case  I  and  Case  II  can  not  be  applied,  viz., 
the  stock  is  not  listed  on  any  exchange,  and  no  actual  sales  have 
been  made  during  the  preceding  fiscal  year,  or  if  the  price  at 
which  sales  have  been  made  is  not  known  to  the  officer  making 
the  return  the  fair  average  value  of  the  capital  stock  shall  be 
estimated,  and  the  surplus  and  undivided  profits  for  the  preced- 
ing fiscal  year  will  be  taken  into  consideration  as  required  by 
the  statute,  as  well  as  the  nature  of  the  business,  its  earning 
capacity  and  average  dividends  paid,  or  profits  earned  during 
the  preceding  five  years. 

Fair  value  of  total  capital  stock  outstanding, 
(rf)  The  fair  value  per  share  ascertained  or  estimated  as  above 
multiplied  by  the  number  of  shares  outstanding  will  give  the  fair 
value  of  the  stock  for  taxation  purposes. 

Deduction  of  $99,000. 

(e)  From  this  total  will  be  deducted  the  sum  of  $99,000,  the 
exemption  allowed  by  law,  and  the  tax  will  be  laid  upon  the 
balance  at  the  rate  of  50  cents  for  each  full  $1,000  of  the  re- 
mainder. 

Tax  due  January,  1917. 

(/)  Upon  the  returns  to  be  made  during  January,  1917,  for 
the  six  months  ending  June  30,  1917,  the  tax  due  will  be  25  cents 
per  $1,000  of  such  remainder. 

Deduction  of  munitions  tax. 

(g)  From  the  tax  due  as  so  determined  will  be  deducted  the 
amount  of  munitions  tax,  if  any,  actually  paid  since  making  the 
last  previous  return.  As  the  special  excise  tax  on  capital  stock 
is  due  in  January,  1917,  and  the  munitions  tax  will  not  be  de- 
termined and  assessed  until  March  or  April,  no  deductions  for 
munitions  tax  will  be  allowed  on  the  January,  1917,  return.  De- 


CAPITAL   STOCK   TAX    REGULATIONS  169 

ductions,  however,  will  be  allowed  on  the  July,  1917,  return  for 
munitions  taxes  actually  paid  prior  to  that  date. 

SEC.  2.  Corporations,  joint-stock  companies  or  associations,  or 
insurance  companies,  organized  for  profit  under  the  laws  of  any 
foreign  country  and  engaged  in  business  in  the  United  States. 

Foreign  corporations. 

(a)  The  tax  imposed  on  such  companies  or  associations  shall 
be  computed  upon  the  actual  capital  invested  in  the  transaction 
of  its  business  in  the  United  States.  The  basis  of  taxation  is 
the  average  amount  of  capital  so  invested  during  the  preceding 
fiscal  year. 

Deduction  of  proportion  of  $99,000  only  allowed  if  corporation 
makes  return  of  total  capital  invested. 

(&)  The  exemption  from  the  amount  of  capital  invested  in 
the  United  States  equal  to  the  proportion  of  $99,000  as  the 
amount  so  invested  bears  to  the  total  amount  invested  in  the 
transaction  of  business  in  the  United  States  or  elsewhere  shall 
only  be  allowed  a  company  or  association  which  makes  return 
to  the  Commissioner  of  Internal  Revenue,  under  these  regula- 
tions, of  the  amount  of  capital  invested  in  the  transaction  of  busi- 
ness outside  of  the  United  States.  Thus  a  foreign  company  or 
association  investing  part  of  its  capital  in  the  transaction  of 
business  in  the  United  States  shall  be  liable  for  tax  in  the 
amount  of  50  cents  for  each  $1,000  of  the  actual  capital  invested 
in  the  United  States,  without  deduction  of  the  said  proportion 
of  $99,000,  unless  it  discloses  in  its  return  the  amount  of  capital 
invested  in  the  transaction  of  business  outside  of  the  United 
States. 

Corporations  not  in  business  during  preceding  taxable  year. 

.  SEC.  3.  Corporations  not  engaged  in  business  during  preceding 
taxable  year. — This  tax  shall  not  be  imposed  upon  any  corpora- 
tion, joint-stock  company  or  association,  or  insurance  company 
not  engaged  in  business  during  the  preceding  taxable  year,  or 
in  the  case  of  the  taxable  period  ending  June  30,  1917,  not  so 
engaged  during  the  year  July  1,  1915,  to  June  30,  1916.  The  tax 
shall  be  computed  upon  each  full  value  of  $1,000  and  not  on 
any  fractional  part  thereof. 

Collection  of  tax. 
Special  list,  Form  23c. 

Art.  7.  On  account  of  the  impracticability  of  issuing  stamps 
in  the  various  amounts,  this  tax  will  be  collected  by  assessment 
on  a  special  list  for  the  months  of  January  and  July,  1917,  and 


170  APPENDIX   B 

annually  thereafter  in  July.  Any  delinquent  returns  made  in 
February  or  other  months,  or  any  assessments  for  delinquency 
in  taxes,  may  be  listed  on  the  regular  list  Form  23,  and  collected 
in  the  usual  way. 

Returns  retained  by  collector. 

(a)  Returns  listed  on  special  lists  will  be  retained  in  the  office 
of  the  collector  as  the  special  list  will  be  prepared  so  as  to  give 
the  essential  data  shown  by  the  return. 

Returns    forwarded   to  commissioner. 

(&)  Returns  listed  on  regular  lists  will  be  forwarded  to  this 
office  with  the  list  for  audit. 

Penalty  of  5  per  cent. 

(c)  Upon  failure  to  pay  the  tax  assessed  within  10  days,  after 
notice  and  demand,  a  penalty  of  5  per  cent,  of  the  tax  unpaid 
and  interest  at  the  rate  of  1  per  cent,  per  month  until  paid  shall 
be  added  to  the  amount  of  such  tax. 

Penalties. 

Administrative  and  assessment  laws  applicable  to  this  law. 
Art.  8.  (a)  Under  section  409  it  is  provided  that  "all 
administrative  or  special  provisions  of  law,  including  the  law 
relating  to  the  assessment  of  taxes  so  far  as  applicable,  are  here- 
by extended  to  and  made  a  part  of  Title  IV,  and  every  person, 
firm,  company,  corporation,  or  association  liable  to  any  tax  im- 
posed by  this  title  shall  keep  such  records  and  render  under 
oath  such  statements  and  returns  as  shall  comply  with  such 
regulations  as  the  Commissioner  of  Internal  Revenue,  with  the 
approval  of  the  Secretary  of  the  Treasury,  may  from  time  to 
time  prescribe/' 

Penalties  for  failure  to  make  return. 

(&)  Any  company  or  association,  therefore,  subject  to  special 
tax  under  section  407  of  this  act,  which  fails  to  make  returns 
during  the  months  of  January,  1917,  and  July,  1917,  and  annually 
in  July  thereafter,  will  be  liable  to  the  penalties  imposed  by  sec- 
tion 3176,  Revised  Statutes,  as  amended  by  section  16,  act  of 
September  8,  1916,  which  reads  as  follows : 

Collector  may  make  the  return. 

If  any  person,  corporation,  company,  or  association  fails  to 
make  and  file  a  return  or  list  at  the  time  prescribed  by  law,  or 
makes,  wilfully  or  otherwise,  a  false  or  fraudulent  return  or 
list,  the  collector  or  deputy  collector  shall  make  the  return  or 


CAPITAL  STOCK   TAX   REGULATIONS  171 

list  from  his  own  knowledge  and  from  such  information  as  he 
can  obtain  through  testimony  or  otherwise.  Any  return  or  list 
so  made  and  subscribed  by  a  collector  or  deputy  collector  shall 
be  prima  facie  good  and  sufficient  for  all  legal  purposes. 

Extension  of  30  days. 

If  the  failure  to  file  a  return  or  list  is  due  to  sickness  or  ab- 
sence the  collector  may  allow  such  further  time,  not' exceeding 
thirty  days,  for  making  and  filing  the  return  or  list  as  he  deems 
proper. 

Fifty  per  cent,  penalty. 

The  Commissioner  of  Internal  Revenue  shall  assess  all  taxes, 
other  than  stamp  taxes,  as  to  which  returns  or  lists  are  so  made 
by  a  collector  or  deputy  collector.  In  case  of  any  failure  to 
make  and  file  a  return  or  list  within  the  time  prescribed  by  law 
or  by  the  collector,  the  Commissioner  of  Internal  Revenue  shall 
add  to  the  tax  fifty  per  centum  of  its  amount  except  that,  when 
a  return  is  voluntarily  and  without  notice  from  the  collector 
filed  after  such  time  and  it  is  shown  that  the  failure  to  file  it 
was  due  to  a  reasonable  cause  and  not  to  willful  neglect,  no  such 
addition  shall  be  made  to  the  tax.  In  case  a  false  or  fraudulent 
return  or  list  is  willfully  made,  the  Commissioner  of  Internal 
Revenue  shall  add  to  the  tax  one  hundred  per  centum  of  its 
amount. 

The  amount  so  added  to  any  tax  shall  be  collected  at  the  same 
time  and  in  the  same  manner  and  as  part  of  the  tax  unless  the 
tax  has  been  paid  before  the  discovery  of  the  neglect,  falsity,  or 
fraud,  in  which  case  the  amount  so  added  shall  be  collected  in 
the  same  manner  as  the  tax. 

(c)  In  addition  to  the  "penalties  imposed  by  section  3176,  Re- 
vised Statutes,  section  408  provides  as  follows : 

Specific  penalty. 

Every  person  who  carries  on  any  business  or  occupation  for 
which  special  taxes  are  imposed  by  this  title,  without  having  paid 
the  special  tax  therein  provided,  shall,  besides  being  liable  to  the 
payment  of  such  special  tax,  be  deemed  guilty  of  a  misdemeanor, 
and  upon  conviction  thereof  shall  pay  a  fine  of  not  more  than 
$500,  or  be  imprisoned  not  more  than  six  months,  or  both,  in  the 
discretion  of  the  court. 

W.  H.  OSBORN, 

Commissioner  of  Internal  Revenue. 
Approved : 

WM.  P.  M ALBURN, 

Acting  Secretary  of  the  Treasury. 


172 


APPENDIX  C 
COLLECTION  DISTRICTS 

WITH  THE 

NAMES  AND  ADDRESSES  OF  COLLECTORS  OF  INTERNAL 

REVENUE 
Revised  to  December  31,  1915 

ALABAMA   (Includes  Mississippi),  JOHN  D.  McNEEL,  Birmingham 

ALASKA   (See  Washington). 

ARIZONA   (See  New  Mexico). 

ARKANSAS,  JACK  WALKER,  Little  Rock 

CALIFORNIA, 

First  District. — The  counties  of  Alameda,  Alpine,  Amador,  Butte,  Cala- 
veras,  Oolusa,  Contra  Costa,  Del  Norte,  Eldorado,  Fresno,  Glenn, 
Humboldt,  Inyo,  Kings,  Lassen,  Madera,  Marin,  M'ariposa,  Men- 
docino,  Merced,  Modcc,  Mono,  Monterey,  Napa,  Nevada,  Placer, 
Plumas,  Sacramento,  San  Benito,  San  Francisco,  San  Joaquin,  San 
Mateo,  Santa  Clara,  Santa  Cruz,  Shasta,  Sierra,  Siskiyou,  Solano, 
Sonoma,  Stanislaus,  Sutter,  Tulare,  Tehama,  Trinity,  Tuolumne, 
Yolo,  Yuba,  and  the  State  of  Nevada. 

JOSEPH    J.    SCOTT,    San    Francisco. 

Sixth  District. — The  counties  of  Imperial,  Kern,  Los  Angeles,  Orange, 
Riverside,  San  Bernardino,  San  Diego,  San  Luis  Obispo,  Santa 
Barbara,  and  Ventura. 

JOHN  P.   CARTER,  Los  Angeles. 

COLORADO    (Including  Wyoming),   MARK   A.    SKINNER,   Denver. 
CONNECTICUT   (Includes  Rhode  Island),  JAMES  J.  WALSH,  Hartford. 
DELAWARE    (See  Maryland). 

FLORIDA,  HENRY  HAYES  LEWIS,  Jacksonville. 
GEORGIA,  AARON  O.  BLALOCK,  Atlanta. 
HAWAII,   JOHN  F.   HALEY,   Honolulu. 
IDAHO   (Sec  Montana). 
ILLINOIS, 

First  District. — The  counties  of  Boone,  Carroll,  Cook,  DeKalb,  Dupage, 
Grundy,  Jo  Daviess,  Kane,  Kankakee,  Kendall,  Lake,  Lasalle,  Lee, 
McHenry,  Ogle,  Stephenson,  Whiteside,  Will,  and  Winnebago. 

JULIUS  F.  SMIETANKA,  Chicago. 

Fifth  District. — The  counties  of  Bureau,  Henderson,  Henry,  Knox, 
Marshall,  Mercer,  Peoria,  Putnam,  Rock  Island,  Stark,  and  Warren. 

EDWARD   D.   McCABE,   Peoria. 

Eighth  District. — The  counties  of  Adams,  Bond,  Brown,  Calhoun,  Cass, 
Champaign,  Christian,  Coles,  Cumberland,  Dewitt,  Douglas,  Edgar, 
Ford,  Fulton,  Greene,  Hancock,  Iroquois,  Jersey,  Livingston,  Logan, 
McDonough,  McLean,  Macon.  Macoupin,  Mason,  Menard,  Mont- 
gomery, Morgan,  MoultrSe,  Piatt,  Pike,  Sangamon,  Schuyler,  Scott, 
Shelby,  Tazewell,  Vermilion,  and  Woodford. 

JOHN   L.   PICKERING,    Springfield. 

Thirteenth  District. — The  counties  of  Alexander,  Clark,  Clay,  Clinton, 
Crawford,  Edwards,  Effingham,  Fayette,  Franklin,  Gallatin,  Hamil- 
ton, Hardin,  Jackson,  Jasper,  Jefferson,  Johnson,  Lawrence,  Madi- 
son, Marion,  Massac,  Monroe,  Perry,  Pope,  Pulaski,  Randolph, 
Richland,  St.  Clair,  Saline,  Union,  Wabash,  Washington,  Wayne, 
White,  and  Williamson. 

JOHN   M.   RAPP,   East   St.   Louis. 
INDIANA 

Sixth  District. — The  counties  of  Adams,  Allen,  Bartholomew,  Benton, 
Blackford,  Brown,  Cass,  Dearborn,  Decatur,  Dekalb,  Delaware, 
Elkhart,  Fayette,  Franklin,  Fulton,  Grant,  Hamilton.  Hancock, 
Hendricks,  Henry,  Howard,  Huntington,  Jackson,  Jasper,  Jay, 
Jefferson,  Jennings,  Johnson,  Kosciusko,  Lagrange,  Lake,  Laporte, 
Lawrence,  Madison,  Marion,  Marshall,  Miami,  Monroe,  Morgan, 
Newton,  Noble,  Ohio,  Porter,  Pulaski,  Randolph,  Ripley,  Rush,  St. 
Joseph,  Shelby,  Starke,  Steuben,  Switzerland,  Tipton,  Union, 
Wabash,  Wayne,  Wells,  White,  and  Whitley. 
PETER  J.  KRUYER,  Indianapolis. 


COLLECTION   DISTRICTS  173 

INDIANA  (Concluded) 

Seventh  District. — The  counties  of  Boone,  Carroll,  Clark,  Clay,  Clin- 
ton, Crawford,  Daviess,  Dubois,  Floyd,  Fountain,  Gibson,  Greene, 
Harrison,  Knox,  Martin,  Montgomery,  Orange,  Owen,  Parke, 
Perry,  Pike,  Posey,  Putnam,  Scott,  Spencer,  Sullivan,  Tippecanoe, 
Vanderburg,  Vermilion,  Vigo,  Warren,  Warrick,  and  Washington. 

ISAAC  R.   STROUSE,   Terre  Haute. 
IOWA,  LOUIS  MURPHY,  Dubuque. 
KANSAS,  WM'.  H.  L.  PEPPERELL,  Wichita. 
KENTUCKY, 

Second  District. — The  counties  of  Allen,  Ballard,  Barren,  Brecken- 
ridge,  Butler,  Caldwell,  Galloway,  Carlisle,  Christian,  Clinton, 
Crittenden,  Cumberland,  Daviess,  Edmonson,  Fulton,  Graves,  Gray- 
son,  Hancock,  Hart,  Henderson,  Hickman,  Hopkins,  Livingston, 
Logan,  Lyon,  M'cCracken,  McLean,  Marshall,  Metcalfe,  Monroe, 
Muhlenberg,  Ohio,  Russell,  Simpson,  Todd,  Trigg,  Union,  Warren, 
and  Webster. 

JOSH  T.    GRIFFITH,   Owensboro. 

Fifth  District. — The  city  of  Louisville  and  the  counties  of  Adair, 
Bullitt,  Casey,  Green,  Hardin,  Henry,  Jefferson,  Larue,  Marion, 
Meade,  Nelson,  Oldham,  Owen,  Shelby,  Spencer,  Taylor,  and 
Washington. 

THOMAS  S.  MAYES,  Louisville. 

Sixth  District. — The  counties  of  Boone,  Bracken,  Campbell,  Carroll, 
Gallatin,  Grant,  Harrison,  Kenton,  Pendleton,  Robertson,  and 
Trimble. 

CHARLTON  B.   THOMPSON,   Covington. 

Seventh  District. — The  counties  of  Bath,  Bourbon,  Boyd,  Carter,  Clark, 
Elliott,  Fayette,  Fleming,  Franklin,  Greenup,  Johnson,  Lawrence, 
Lewis,  Martin,  M'ason,  Menifee,  Montgomery,  Morgan,  Nicholas, 
Powell,  Rowan,  Scott,  and  Woodford. 

BEN  MARSHALL,  Lexington. 

Eighth  District. — The  counties  of  Anderson,  Bell,  Boyle,  Breathitt, 
Clay,  Estill,  Floyd,  Garrard,  Harlan,  Jackson,  Jessamine,  Kaott, 
Knox,  Laurel,  Lee,  Leslie,  Letcher,  Lincoln,  Madison,  Magoffin, 
Mercer,  McCreary,  Owsley,  Perry,  Pike,  Pulaski,  Rockcastle, 
Wayne,  Whitley,  and  Wolfe. 

JOHN   W.    HUGHES,    Danville. 

LOUISIANA,   JOHN   Y.   FAUNTLEROY.    New   Orleans. 
MAINE    (See  New  Hampshire). 
MARYLAND,   JOSHUA  W.    MTLES,   Baltimore. 

District  of  Maryland  consists  of  the  following-named  territory: 
The   States   of  Maryland  and  Delaware,   the  District  of   Columbia, 
and    the    counties    of    Accomac    and    Northampton   of    the    State    of 
Virginia. 
MASSACHUSETTS,    JOHN  F.   MALLEY,   Boston. 

This   district   is   officially   designated   as   the    Third   District   of 
Massachusetts. 
MICHIGAN, 

First  District. — Counties  of  Alcona,  Alpena,  Arenac,  Bay,  Branch, 
Calhoun,  Cheboygan,  Clare,  Clinton,  Crawford,  Genessee,  Gladwin, 
Gratiot,  Hillsdale,  Huron,  Ingham,  losco,  Isabella,  Jackson,  Lat>eer, 
Lenawee,  Livingston,  M'acomb,  Midland,  Monroe,  Mtontmorency, 
Oakland,  Ogemaw,  Oscoda,  Otsego,  Presque  Isle,  Roscomonon,  Sag- 
inaw,  Sanilac,  Shiawassee,  St.  Clair,  Tuscola,  Washtenaw,  and 
Wayne. 

JAMES   J.   BRADY,    Detroit. 

Fourth  District. — Counties  of  Alger,  Allegan,  Antrim,  Baraga,  Barry, 
Benzie,  Berrien,  Cass,  Charlevoix,  Chippewa,  Delta,  Dickinson, 
Eaton,  Emmet,  Gogebic,  Grand  Traverse,  Houghton,  Ionia,  Iron, 
Kalamazoo,  Kalkaska,  Kent,  Keweenaw,  Lake,  Leelanau,  Luce,  Mack- 
inac,  M,aniste,e  Marquette,  Mason,  Mecosta,  Menommee,  Mis- 
saukee,  Montcalm,  M'trskegon,  Newaygo,  Oceans,  Ontonagon.  Osceola, 
Ottawa,  St.  Joseph,  Schoolcraft,  Van  Buren,  and  Wexford. 

EMANUEL   J.   DOYLE,    Grand   Rapids. 
MINNESOTA.   EDWARD  J.   LYNCH,   St.   Paul. 
MISSISSIPPI  (See  Alabama). 

The  State  of  Mississippi  detached  from  the  District  of  Louisiana 
and   added  to  the  District  of  Alabama  June  1,   1908. 


174 


APPENDIX    C 


MISSOUBI, 

First  District.—  The  counties  of  Adair,  Audrian,  Bellinger,  Boon*, 
Butler,  Callaway,  Oape  Girardeau,  Carter,  Clark,  Crawford,  Deat 
Dunklm,  Franklin,  Gasconade,  Howard,  Iron,  Jefferson,  Knox] 
Lewis,  Lincoln,  Linn,  Macon,  Madison,  Maries,  Marion,  Mississippi, 
Montgomery,  Monroe,  New  Madrid,  Oregon,  Osage,  Pemiscot,  Perry, 
Phelps,  Pike,  Pulaski,  Rails.  Randolph,  Reynolds,  Ripley,  St. 
Charles,  St.  Francois,  Ste.  Genevieve,  St.  Louis,  Schuyler,  Scot- 
land, Scott,  Shannon,  Shelby,  Stoddard,  Warren,  Washington,  and 

GEORGE  H.   M'OORE,   St.   Louis. 

Sixth  District.  —  The  counties  of  Andrew,  Atchison,  Barry,  Barton, 
Bates,  Benton,  Buchanan,  Caldwell,  Camden,  Carroll,  Cass  Cedar 
Chanton,  Christian,  Clay,  Clinton,  Cole,  Cooper,  Dade  Dallas, 
Daviess,  Dekalb,  Douglas,  Gentry,  Greene,  Grundy.  Harrison, 
Henry,  Hickory,  Holt,  Howell,  Jackson,  Jasper,  Johnson,  Laclede, 
Lafayette,  Lawrence,  Livingston,  McDonald,  M'ercer,  Miller,  Moni- 
teau,  Morgan,  Newton,  Nodaway,  Ozark,  Pettis,  Platte,  Polk, 
Putnam,  Ray,  St.  Olair,  Saline,  Stone,  Sullivan,  Taney,  Texas, 
Vernon,  Webster,  Worth,  and  Wright. 

EDGAR    M.    HARBER,    Kansas    City 

c-  WHALEY'  Hciena- 


NEVADA    (See  First  California). 

NEW  HAMPSHIRE   (Includes  Maine  and  Vermont),  SETH  W.  JONES, 

Portsmouth. 
NEW  JERSEY, 

First  District.  —  The  counties  of  Atlantic,  Burlington,  Cainden,  Cape 
May,  Cumberland,  Gloucester,  Mercer,  Monmouth,  Ocean,  and 
Salem. 

SAMUEL   IREDELL,   Camden. 

Fifth  District.  —  The  counties  of  Bergen,  Essex,  Hudson,  Hunterdon, 
Middlesex,  Morris,  Passaie,  Somerset,  Sussex,  Union,  and  Warren. 

CHARLES  V.  DUFFY,  Newark. 
NEW  MEXICO    (Includes  Arizona),   LEWIS  T.   CARPENTER.   Phoenix, 

Arizona. 
NEW  YORK, 

First  District.  —  The  counties  of  Kings,  Nassau,  Queens.  Richmond, 
and  Suffolk.  . 

HENRY  P.  KEITH,  Brooklyn. 

Second  District.  —  The  first,  second,  third,  fourth,  fifth,  sixth,  eighth, 
ninth,  and  fifteenth  wards  of  New  York  City;  that  portion  of  the 
fourteenth  ward  lying  west  of  the  center  of  Mott  street;  that 
portion  of  the  sixteenth  ward  lying  south  of  the  center  of  West 
Twenty-fourth  Street,  and  Governors  Island. 

JOHN   Z.   LOWE,   Jr.,    Custom   House,   New  York. 

Third  District.  —  The  seventh,  tenth,  eleventh,  twelfth,  thirteenth, 
seventeenth,  eighteenth,  nineteenth,  twentieth,  twenty-first,  and 
twenty-second  wards  of  New  York  City;  that  part  of  the  four- 
teenth ward  lying  east  of  the  center  of  Mott  Street;  that  part 
of  the  sixteenth  ward  lying  north  of  the  center  of  West  Twenty- 
fourth  Street,  and  Blackwells,  Randalls,  and  Wards  Islands. 
MARK  EISNER,  1150  Broadway,  New  York. 

Fourteenth  District.  —  The  counties  of  Albany,  Clinton,  Columbia, 
Dutchess,  Essex,  Fulton,  Greene.  Hamilton.  Montgomery.  Orange, 
Putnam,  Rensselaer,  Rockland,  Saratoga,  Schenectady,  Schoharie, 
Sullivan,  Ulster,  Warren,  Washington,  and  Westchester,  and  the 
twenty-  third  and  twenty-fourth  wards  of  New  York  City. 
ROSCOE  IRWIN,  Albany. 

Twenty-first  District.  —  The  counties  of  Brooine,  Cayuga,  Chenango, 
Cortland,  Delaware,  Franklin,  Herkimer,  Jefferson,  Lewis,  Madison, 
Oneida.  Onondaga,  Oswego,  Otsego,  St.  Lawrence,  Schuyler,  Seneca, 
Tioga,  Tompkins,  and  Wayne. 

NEIL  BREWSTER,   Syracuse. 

Twenty-eighth  District.  —  The  counties  of  Allegany.  Cattaraugus,  Chaii- 
taqua,  Chemung,  Erie,  Genessee,  Livingston,  Monroe,  Niagara,  On- 
tario, Orleans,  Steuben,  Wyoming,  and  Yates. 

VINCENT    H.    RIORDAN,    Buffalo. 


COLLECTION   DISTRICTS  175 

NORTH  CAROLINA, 

Fourth  District. — The  counties  of  Alamance,  Beaufort,  Bertie,  Bladcn, 
Brunswick,  Camden,  Carteret,  Caswell,  Chatham,  Chowan,  Columbus, 
Craven,  Cumberland,  Currituck,  Dare,  Duplin,  Durham,  Edgecombe, 
Franklin,  Gates,  Granville,  Greene,  Halifax,  Harnett,  Hertford, 
Hyde,  Johnston,  Jones,  Lenoir,  Martin,  Montgomery,  M)oore,  Nash, 
New  Hanover,  Northampton,  Onslow,  Orange,  Pamlico,  Pasquotank, 
Pender,  Perquimans,  Person,  Pitt,  Richmond,  Robeson,  Samson, 
Scotland,  Tyrrell,  Vance,  Wake,  Warren,  Washington,  Wayne,  and 
Wilson. 

JOSIAH  W.   BAILEY,   Raleigh. 

Fifth  District. — The  counties  of  Alexander,  Allegany,  Anson,  Ashe, 
Buncombe,  Burke,  Cabarrus,  Caldwell,  Catawba,  Cherokee,  Clay, 
Davidson,  Davie,  Forsyth,  Gaston,  Graham,  Guilford,  Haywood, 
Henderson,  Iredell,  Jackson,  Lincoln,  McDowell,  Macon,  Madison, 
Mecklenburg,  Mitchell,  Polk,  Randolph,  Rockingham,  Rowan, 
Rutherford,  Stanly,  Stokes,  Surry,  Swain,  Transylvania,  Union, 
Watauga,  Wilkes,  Yadkin,  and  Yancey. 

ALSTON  D.  WATTS,  Statesville. 

NORTH  AND  SOUTH  DAKOTA,  JAMES  COFFEY,  Aberdeen,  S.  Dak. 
OHIO, 

First  District. — The  counties  of  Brown,  Butler,  Clarke,  Olermont, 
Clinton,  Fayette,  Greene,  Hamilton,  Highland,  Miami,  Montgomery, 
Preble,  and  Warren. 

ANDREW    0.    GILLIGAN,    Cincinnati. 

Tenth   District. — The   counties   of   Allen,   Auglaize,    Champaign,    Craw- 
ford,   Darke,    Defiance,    Erie,    Fulton,    Hancock,    Hardin,    Henry, 
Huron,    Logan,    Lucas,    M'ercer,    Ottawa,    Paulding,    Putnam,    San- 
dusky,   Seneca',   Shelby,  Van  Wert,  Williams,  Wood,   and  Wyandot. 
FRANK  B.   NILES,   Toledo. 

Eleventh  District. — The  counties  of  Adams,  Athens,  Coshocton,  Dela- 
ware, Fairfield,  Franklin,  Gallia,  Guernsey,  Hocking,  Jackson, 
Knox,  Lawrence,  Licking,  Madison,  Marion,  M'eigs,  Morgan,  Mor- 
row, Muskingum,  Noble,  Perry,  Pickaway,  Pike,  Ross,  Scito,  Union, 
Vinton,  and  Washington. 

BERIAHE.  WILLIAMSON,  Columbus. 

Eighteenth  District. — The  counties  of  Ashland,  Ashtabula,  Belmont, 
Carroll,  Columbiana,  Cuyahoga,  Geauga,  Harrison,  Holmes,  Jefferson, 
Lake,  Larain,  Mahoning,  Medina,  Monroe,  Portage,  Richland, 
Stark,  Summit,  Trumbull,  Tuscarawas,  and  Wayne. 

HARRY  H.   WEISS,    Cleveland. 

OKLAHOMA,   HUBERT  L.  BOLEN,    Oklahoma   City. 
OREGON,   MILTON  A.   MILLER,  Portland. 
PENNSYLVANIA, 

First  District — The  counties  of  Berks,  Bucks,  Chester,  Delaware,  Le- 
high,  Montgomery,  Philadelphia,  and  Schuylkill. 

EPHRAIM    LEDERER,    Philadelphia. 

Ninth  District. — The  counties  of  Adams,  Bedford,  Blair,  Cumberland, 
Dauphin,  Franklin,  Fulton,  Huntington,  Juniata,  Lancaster,  Leba- 
non, Mifflin,  Perry,  Snyder,  York. 

BENJAMIN  F.    DAVIS,    Lancaster. 

Twelfth  District. — Bradford,  Carbon,  Center,  Clinton,  Columbia,  Lack- 
awanna,  Luzerne,  Lycoming.  Monroe,  Montour,  Northampton, 
Northumberland,  Pike.  Potter,  Sullivan,  Susqnehanna.  Tioga,  Union. 
Wayne,  Wyoming.  (Twelfth  District  reestablished  May  1,  1915.) 

FRED.  C.   KIRKENDALL,   Scranton. 

Twenty-third  District. — The  counties  of  Allegheny,  Armstrong,  Beaver, 
Butler,  Cambria,  Cameron,  Clarion,  Clearfield,  Crawford,  Elk,  Erie, 
Fayette,  Forest,  Greene,  Indiana,  Jefferson,  Lawrence,  McKean, 
Mercer,  Somerset,  Venango,  Warren,  Washington  and  Westmore- 
land. 

0.    GREGG    LEWELLYN,    Pittsburgh. 

RHODE  ISLAND  (See  Connecticut). 

POTTTH  CAFOUNA,  DUNCAN  C.  HEYWARD,   Columbia. 

ROTTTH  DAKOTA  (See  North  and  South  Dakota). 

TF.NNESSEE.   EDWARD  B     CRAIG,   Nashville. 

TEXAS,   ALEXANDER   S.  WALKER,  Austin. 

TTTAH   (See  Montana). 

VERMONT    (See  New  Hampshire). 


176  APPENDIX    C 

VIRGINIA 

Second  District. — The  counties  of  Amelia,  Appomattox,  Brunswick, 
Buckingham,  Caroline,  Charles  City,  Chesterfield,  Cumberland, 
Dinwiddie,  Elizabeth  City,  Essex,  Fluvanna,  Gloucester,  Goochland, 


umberland,    Nottaway,    Powhatan,    Prince    Edward,    Prince    George, 
Princess    Anne,    Richmond,    Stafford,    Southampton,    Spottsylvania, 
Surry,  Sussex,  Warwick,  Westmoreland,  and  York. 
RICHARD  C.  L.  MONCURE,  Richmond. 

Sixth  District. — The  counties  of  Albemarle,  Alexandria,  Alleghany, 
Amherst,  Augusta,  Bath,  Bedford,  Bland,  Botetourt,  Buchanan, 
Campbell,  Carroll,  Charlotte,  Clarke,  Craig,  Culpeper,  Dickenson, 
Fairfax,  Fauquier,  Floyd,  Franklin,  Frederick,  Giles,  Grayson, 
Greene,  Halifax,  Henry,  Highland,  Lee,  Loudoun,  M'adison,  Meck- 
lenburg, Montgomery,  Nelson,  Orange,  Page,  Patrick,  Pittsylvania, 
Prince  William,  Pulaski,  Rappahannock,  Roanoke,  Rockbridge, 
Rockingham,  Russell,  Scott,  Shenandoah,  Smyth,  Tazewell,  Warren, 
Washington,  Wise,  and  Wythe. 

JOHN   M.    HART,    Roanoke. 

The  counties  of  Accomac  and  Northampton  are  in  the  District 
of  Maryland. 

WASHINGTON  (Includes  Alaska),  DAVID  J.  WILLIAMS,  Tacoma. 
WEST  VIRGINIA,  SAMUEL  A.  HAYS,  Parkersburg. 
WISCONSIN, 

First  District. — Counties  of  Brown,  Calumet,  Dodge,  Door,  Florence, 
Fond  du  Lac,  Forest,  Green  Lake,  Kenosha,  Kewaunee,  Manitowoc, 
Marinette,  M'arquette,  Milwaukee,  Oconto,  Outagamie,  Ozaukee, 
Racine,  Shawano,  Shebpygan,  Walworth,  Washington,  Waukesha, 
Waupaca,  Waushara,  Winnebago,  and  county  of  Langlade  with  ex- 
ception of  the  eight  townships  of  said  county  which  were  formerly 
in  Lincoln  County. 

PAUL  A.   HEMMY,   Milwaukee. 

Second  District. — Counties  of  Adams,  Ashland,  Barron,  Bayfield,  Buf- 
falo, Burnett,  Chippewa,  Clark,  Columbia,  Crawford,  Dane,  Doug- 
las, Dunn,  Eau  Claire,  Grant,  Green,  Iowa,  Iron,  Jackson,  Jeffer- 
son, Juneau,  La  Crosse,  Lafayette,  Lincoln,  Marathon,  Monroe, 
Oneida,  Pepin,  Pierce,  Polk,  Portage,  Price,  Richland,  Rock,  Rusk, 
St.  Croix,  Sauk,  Sawyer,  Taylor,  Trempealeau,  Vernon,  Vilas, 
Washburn,  Wood,  and  the  eight  townships  in  the  western  part  of 
Langlade  County  which  were  formerly  in  Lincoln  County. 

BURT    WILLIAMS,    Madison. 
WYOMING  (See  Colorado). 


INDEX 


Page 

Abatement ;  claim  for 15 

Absence;  extension  of  time  because  of: 

Corporation    48, 157 

Individual    13, 137 


Absence  abroad  does  not  absolve  from  making  return... 

Accident  insurance  

Accident ;  reimbursement  of  expenses  of 

Account :  Page 

Advertising    101 

Allowance    89 

Auditing  expense-. —  101 

Auto  expense  101 

Bad  debts  103 

Commissions    99 

Depletion   106 

Depreciation   106 

Discounts  allowed 90 

Discounts  received  —  90 

Dividends  paid 110 

Dividends  received ...  97 

Duties   102 

Fire  loss   105 

Freight  on  purchases.  91 

Freight  on  sales 91,101 

Fuel,  light,  power,  etc.  99 
General     factory    ex- 
pense      101 

General  office  expense  101 
Income    from    sundry 

sources  98 

Insurance  101 

Interest  paid  93 

Interest  received 93 

Inventory  91 

Labor,      wages      and 

commissions  98 

Legal   expense 101 

Light,  heat  and  power  99 


12 
18 
18 


Merchandise   109 

Negative    (note) 70 

Packing   supplies 101 

Perpetual     (running) 

inventory    Ill 

Postage  101 

Productive  wages 99 

Production    supplies . .  101 

Profit  and  loss 109 

Purchases    90 

Rebates    90 

Rentals    paid 92 

Rentals    received 92 

Repair   99 

Return    sales 89 

Royalties  92 

Salaries  of  officers...  100 

Sales    (merchandise) .  89 

Sales  of  capital  assets  105 

Shipping  supplies 101 

Stable  expense 101 

Stationery   and   print- 
ing    101 

Surplus   110 

Taxes  paid 107 

Taxes  withheld 107,108 

Telegraph     and     tele- 
phone      101 

Traveling   expense 101 


178  INDEX 

Page 
Account;  books  of: 

Best  guide  to  income 87 

Corporation's 53 

Examination  of,  by  Internal  Revenue  Officers 14, 87 

Individual's    119 

Reconciliation  of,  with  return 110 

Accounts : 

Accrual  of    88 

Basis  of  keeping,  corporations 86 

Basis  of  keeping,  individuals 119 

Distribution  of  88 

Prepayment  of   88 

What  justifies  charging  off 104 

Worthless   (see  "Debts,  bad"). 

Accounts  receivable   103 

Accrual  basis  of  bookkeeping 88, 112 

Accruals  :  treatment  of  accruals  in  return 88 

Accrued  interest  on  bonds  purchased 29 

Accumulation  of  surplus 132 

Act  of  1916,  Income  Tax  Law  (Sept  8,  1916) 129 

Act  of  1916,  Federal  Corporation  Capital  Stock  Tax  Law 

(Sept.  8,  1916)   161 

Actors  and  actresses;  depreciation  of  costumes  of 82 

"  Actually  paid  "  or  "  paid  during  the  year  " 88 

Additional  tax : 

Computation,   illustration   of 127 

Dividends  included  in  computing 10, 130 

Rates  of   10, 129 

Undistributed  profits  subject  to 131 

Undistributed  surplus  subject  to 16, 130 

Additions  and  betterments   (see  "Improvements"). 

Administration  of  estates,  income  during 20 

Administration  of  Income  Tax  Law;  provisions  of 155 

Administrators    (see  "Fiduciaries"). 
Agent : 

Collecting  agent  of  foreign  income 32 

Insurance  agent,  commissions  of . « 21 

Liability  of,  making  return 12 

Power  of  attorney,  agent  under 12 

Real  estate  agent,  commissions  of 29 

Real  estate  agent,  not  fiduciary. , .  16 

Real  estate  agent,  withholding  by 36 

Return  may  be  made  by 12, 137, 141 


INDEX  179 

Page 

Agricultural  corporations,   exempt 53 

Aliens,  resident  and  non-resident 15 

Alimony,  not  deductible 29 

Allowance  account  (deduction  from  sales) 89 

Allowance  for  depreciation 71 

Amended  law  9 

Amended  return  51 

Amended  statute  (Sept.  8,  1916) 129 

Amortization  of  bonds  71 

Amortization  of  discounts  on  bonds 64 

Anderson  vs.  Forty-two  Broadway  Co 64 

Annual  return  (see  "Returns"). 

Annuities  17 

Appeal,  right  of : 159 

Appendix  A,  Federal  Income  Tax  Law  (Sept.  8,  1916) . .  129 
Appendix  B,  Federal  Corporation  Capital  Stock  Tax  Law 

(Sept.   8,   1916,)    and  regulations 161 

.Appendix  C,  list  of  collection  districts  and  collectors  of 

United  States 172 

Apportionment  of  income  of  1916  of  designated  fiscal  year 

of  corporations    50 

Appreciation  in  value  of  good  will 81 

Appreciation  in  value  of  assets  not  income 53, 82 

Assessments : 

Capital  stock,  assessment  of,  not  income 60 

Capital  stock,  assessment  of,  not  deductible  by  indivi- 
duals      29 

General  assessment  142 

Local  benefits,  assessment  of 25 

Notice  of  assessment,  corporations 47 

Notice  of  assessment,  individual 14 

Second  assessment   50 

Assets ;  deferred  88 

Assets ;  computing  profit  on  sales  of 22 

Assets ;  income  on  sales  of 58 

Associations ;  income  of  mutual 58 

Attorney's  fees,  when  returnable 20 

Auto  trucks,  depreciation  of 80 

Auxiliaries,  depreciation  of 78 

Bad  debts  account 103 

Bad  debts  (see  "Debts,  Bad"). 

Baldwin  Locomotive  Works  vs.  McCoach 82 


180 


INDEX 


Bank:  Page 

Depreciation  of  securities  of 82 

Interest  on  deposits  in 36 

Banking  department ;  order  by  State  or  Federal 82 

Bankruptcy  of  debtor 104 

Batteries,  depreciation  of  storage 78 

Bequests  and  gifts,  exempt 21, 132 

Beneficiaries : 

Heirs  and  legatees,  income  of 12 

Income  received  by 12, 122, 131 

Proceeds  of  accident  policy  paid  to 18 

Proceeds  of  life  insurance  paid  to 132 

Return  by    12, 20 

Undistributed  income  returnable  by  fiduciary 11 

Betterments  (see  "Improvements"). 

Boards  of  trade,  exempt 54 

Boilers  and  engines,  depreciation  of 76 

Bonded  indebtedness    94 

Bonds : 

Accrued  interest  on  bonds  purchased 29 

Amortization  of  bonds 71 

Charging  off  depreciation  on  bonds 82 

Debenture  bonds   95 

Income  on  Government  bonds  (exempt) 19,  93 

Interest  on  bonds 64 

Premium  on  fidelity  bond  paid  by  employee 29 

Premium  on  bonds  purchased 65 

Redemption  of  bonds 63 

Tax-free  covenants  in  bonds 32 

Withholding  tax  from  interest  on  bonds 31 

Bonuses : 

Subject  to  withholding  of  tax 36 

Taxable  as  income  of  recipient 20 

When  deductible   66, 100 

Book  value: 

Decrease  in  book  value  not  deductible 82 

Increase  in  book  value  not  income 53,  82 

Books  of  account   (see  "Accounts,  Books  of"). 

Bookkeeping  methods : 

Corporations'    86 

Cost-system    90, 110 

Individuals' 119 

Branches ;    foreign    51 


INDEX  181 

Page 

Brands : 

Depreciation  of  brands 82 

Loss  on  sale  of  brands 83 

Buildings : 

Buildings  erected  by  tenant 74 

Depreciation  on  buildings,  generally. . . 72 

Depreciation  on  dwellings 74 

Depreciation  on  factory  buildings 73 

Depreciation  on  farm  buildings 75 

Determining  cost  of  buildings  for  depreciation  purposes.  72 
Dilapidated  buildings  removed  by  authority  of  Govern- 
ment      28 

Improvements  and  betterments 28 

Repairs  to  buildings 73 

Voluntary  removal  of  buildings 28 

Business : 

Individuals  having  more  than  one  business 26 

Losses  in  business 26 

Place  of  business,  filing  returns  at 13, 46 

Cables  and  wires,  depreciation  of 78 

Calendar  year : 

Corporation  return  for 46, 143 

Individual  tax  based  on 10, 130 

Campaign  expenses   29 

Capital  employed  in  the  business,  defined 

Capital  employed  in  business;  interest  deductible  based  on.  93 

Capital  returned  to   stockholders 

Capital  assets: 

Appreciation  in  value  of 53,  82 

Depreciation  of    68 

Increase  or  decrease  in  book  value  of 82 

Losses  on  61, 105 

Profits  on  22, 23,  58, 105 

Sales  of  105 

Valuation  of   23 

Capital  Stock: 

Assessment  of  capital  stock  not  income 60 

Capital  stock  outstanding  at  close  of  year 108 

Depreciation  of  stock 82 

Dividends  on  stock  (see  "Dividends"). 

Exchange  of  property  for  stock 

Exchange  of  shares 19 


182  INDEX 

Page 
Capital  Stock: 

Sale  of  "  rights  "  to  subscribe 19 

Sales  of  stock  at  premium 60 

Stock  having  no  par  value 94 

Capital  Stock  Tax  Law  (Sept.  8,  1916) 161 

Capital  Stock  Tax  Law  Regulations 163 

Cash  value  of  dividends  : 

Dividends  declared  payable  in  securities 18 

Stock  dividends  19 

Cemetery  companies,  exempt 54 

Certificates : 

Claims    for    deductions 35 

Claims  for  exemption 34, 103, 140 

Scrip   33 

Charitable  organizations,   exempt 54 

Christmas  gifts    101 

Citizen  residing  abroad  must  make  return 12 

Civic  league  or  association,  exempt 54 

Claims : 

Abatement   of   assessment 15 

Exemption,  false  representation  in  claim 34 

Excess  amounts  paid  to  Government 15 

Excess  amounts  withheld 35, 140, 141 

Refund  of  taxes 15 

Specific  exemptions 24 

Statute  of  limitation 15 

Clergymen  ;   income  of 21 

Cleveland,  F.  A 97 

"  Close  corporations  "  not  exempt 56 

Clubs  organized  for  pleasure  and  recreation,  exempt 

Cohen,  Hyman,  vs.  John  Z.  Lowe,  Jr.,  Collector 72 

Collateral ;  interest  on  debts  secured  by 64 

Collecting  agents  of  foreign  income 

Collection  districts  ;  list  of 172 

Collection    of    tax;    due    date    and    penalty    for    delayed 
payments : 

Corporations    '47, 48 

Individuals    14 

Collectors  of  Internal  Revenue: 

List  of  collectors  in  United  States 172 

Returns  made  by  collectors  for  corporations 46 

Returns  made  by  collectors  for  individuals 13 


INDEX  183 

Page 

Commercial  paper  of  corporations ;  interest  on 33 

Commission  account  99 

Commissions : 

Executors'    121 

Insurance  agents' 21 

Labor,  wages  and  commissions 98 

Real  estate  agents' 29 

Salesmen's 36 

When  returnable  121 

Compensation  of   trustee 21 

Compromise  of  penalty  for  failure  to  make  return 13 

Conservators  (see  "Fiduciaries"). 

Contingent  reserves  63 

Contracting  corporations ;  gross  income  of 57 

Co-operative  associations   (exempt) 54 

Co-partnerships  (see  "  Partnerships  "). 

Copyrights ;   depreciation  of 80 

Corporate  obligations : 

Exempt  organizations  subject  to  withholding  of  tax 55 

Interest  on  bonds,  mortgages  and  deeds  of  trust 31 

Limitation  of  interest  deductible 93 

Ordinary  commercial  paper 33 

Tax-free  covenant    32 

Corporations : 

Additions   and   betterments 73 

Apportionment  of   income  for   1916 50 

Assessment   of    capital    stock 60 

Bonds   issued   at   discount 64 

Books    of    account 53 

Close  corporations    56 

Cost-system    110 

Deductions    (see  "Deductions   in  Returns  of   Corpora- 
tions")- 

Dividends  received   58 

Doubtful   as   to   exemption 56 

Exempt  organizations    53 

Exempt    organizations    includes    foreign    of    the    same 

classes    56 

Foreign  income  of  domestic  corporations 46 

Foreign  branches  51 

Gross  income  of  manufacturing  corporations 56 

Gross  income  of  mercantile  corporations 57 

Gross  income  of  miscellaneous  corporations 57 


184  INDEX 

Page 
Corporations : 

Gross  income  of  contracting  corporations 57 

Gross  income  of  insurance  companies 58 

Income  of  domestic  corporations 45, 143 

Income  of  foreign  corporations 45, 148 

Incompletely  organized  corporations 51 

Interstate   commerce    53 

Net  income   , 56 

Return,  false  or  fraudulent 49 

Return,  holding  companies  51 

Return,  mercantile  corporations  112 

Return,  prepared  by  Collector  of  Internal  Revenue 49 

Return,  refusal  or  neglect  to  prepare 49 

Return,  receivers  and  trustees 52 

Return,  specific  exemption  46 

Return,  subsidiary  companies  52 

Return,  when  due,  where,  etc 46, 47,  51,  52,  53, 112 

Return,  withheld  taxes   103 

Corporations ;   foreign : 

Deductions   allowed    66, 148, 149, 150 

Income    45, 148 

Where  to  file  return 46 

Corporations;  non-resident  alien: 
Exemption  of  withholding  tax   from   income 37 

Cost-system : 

Manufacturing   corporation   operating 110 

"  Purchases  "  according  to 90 

Reliability  of 91 

Costumes  of  actors  and  actresses,  depreciation 82 

Cost  of  manufactures   Ill 

Cost  of  property  acquired  prior  to  March  1,  1913: 

Corporations    59, 105 

Individuals    23 

Coupon  interest   31, 141 

Courts ;  jurisdiction  of 159 

Craven,   George  M 76, 78 

Crop  shares ;   farmers 39 

Customs  duties   102 

Damages  received  for   injuries   sustained 18 

Damage  suits,  test  of  deductibility  of  payments  of 28 

Debenture  bonds ;   interest  on 95 


INDEX  185 

Page 

Debts,  bad: 

Bankruptcy    * 104 

Corporations    62 

Deductible 103 

Individual    27, 125, 133 

Reserve    62 

Deceased  persons ;  income  to  time  of  death  of 

Deductions  in  return  of  domestic  corporations: 

Allowable .61, 146 

Amortization  of  bonds 64 

Bad  debts  62 

Defalcation,  embezzlement  66 

Depletion    62, 146 

Depreciation    61, 68, 146 

Expenses,  necessary   61, 146 

Improvements   (not  deductible) 146 

Income  tax  paid 66 

Interest    63, 64, 93 

Losses    61, 146 

Organization  expense  65 

Premium  on  bonds 65 

Salesmen's  expenses   66 

Taxes    148 

Tax  withheld  from  interest,  coupons,  etc 31,141 

Tax  withheld  on  income    in    excess  of  $3,000  per  an- 
num     33, 137, 139 

Deductions  in  returns  of  foreign  corporations : 

Depreciation    66, 68 

Depletion    67 

Interest    67 

Losses    66 

Necessary  expenses  66 

Improvements    (not  allowed) 67 

Restoring  property   67 

Taxes    67 

Deductions  in  returns  of  individuals: 

Accrual  basis  of  bookkeeping 124 

Bad  debts  27, 125, 133 

Depletion   27, 28, 133 

Depreciation    68, 133 

Dividends    9, 18, 134 

Exemptions    (see  "Exemptions"). 

Improvements   (not  deductible) 25, 28, 134 


186  INDEX 

Page 
Deductions  in  returns  of  individuals: 

Income  tax,  paid , 25 

Interest    124, 133 

Living  expenses  (not  deductible) 25 

Losses    124, 133 

Necessary  expenses  25, 124, 133 

Non-resident  alien ;  deductions  of 29, 134, 135 

Normal  tax  withheld    31, 33, 134 

Only  items  applicable  to  the  year  deductible 21 

Prorating  compensation  of  trustees 21 

Tax  withheld  in  excess 35, 140 

Taxes    25, 124, 133 

Deeds  of  trust ;  interest  on 31 

Defalcation,   when   deductible 66 

Deferred  assets    88 

Delay  in  filing  return  (see  "Failure  to  file  return"). 

Delayed  payment  of  tax;   penalty: 

Corporation    47 

Individual     14 

Depletion  of  natural  deposits: 

Deductible  by  corporations 62 

Deductible  by  individuals 27, 28, 126, 133 

Deductible  by  non-resident  alien 30 

Gas  and  oil  wells 27,75 

Ledger  account  of  depletion 106 

Limitation  of  depletion 133 

Mines    28, 75 

Purpose  of  depletion 106 

Depreciation : 

Account  of  depreciation 106 

Deductible  by  corporation 61 

Deductible   by   individual 27, 133 

Depreciation  defined 68 

Diminishing  value  method 68 

Entries  of  depreciation 69 

Equal  instalment  method 68 

Excess  charge  for  depreciation  is  income 71 

Fixing  upon  rates  for  depreciation 77 

Limitation  of  amount  chargeable 71 

Methods  of  computing 68 


INDEX 


187 


Page 


Depreciation : 

Property  subject  to  depreciation 
Page 

Auto  trucks 80 

Auxiliaries  78 

Belted   generators ....        78 
Boilers  and  engines . .        76 
Brands    (not    deduct- 
ible)            82 

Buildings  72 

Copyrights    80 

Dwellings   74 

Farm  buildings 75 

Furniture  and  fixtures        74 
Good    will     (not    de- 
ductible)            81 

Horses    I        81 

Inventories     (not    de- 
ductible)            83 

Investments    (not   de- 
ductible)            82 

Laundry    equipment..        79 

Machinery    75 

Miscellaneous     equip- 
ment            78 

Purpose  of  depreciation 77 

Rates  of  depreciation,  generally 71, 77 

Repairs  and  replacements 76 

Reserve  for  depreciation 69, 71 

Treatment  of  depreciation  in  sales  of  capital  assets 22 

Dicksee,  L.  R 75, 76, 79 

Disclosing   information   prohibited 154 

Discounts  allowed  90 

Discounts    received    90 

Discounts;  reserve  for: 

Amortization  of  discounts  on  bonds , 

Discounts  on  sales  of  merchandise 

Dissolved  corporations;  return  of  capital  of. 
Distribution  of  accounts. . 


Motors   78 

Patents 79 

Patterns  79 

Shafting    78 

Shop  equipment 78 

Stable  equipment. ...  81 

Steam  piping 78 

Steam  turbines 78 

Stocks  and  bonds  (not 

deductible)    82 

Stock   on    hand    (not 

deductible)    83 

Storage  batteries 78 

Switchboards    78 

Theatre  costumes 82 

Timber  lands 75 

Tools   78 

Trade  marks  (not  de- 
ductible)      82 

Wires   and  cables . .  78 


64 

63 

19 

88 

District  court,  jurisdiction  of 159 

Diverting  reserves  prohibited 70 

Dividends : 

Accounts  of  dividends 97, 110 

Credits  to  partners  for  proportionate  share  of  dividends.  43 


188  INDEX 

Page 

Dividends : 

Dividends,  defined  143 

Distributed  or  undistributed 130 

Declared  out  of  profits  earned  prior  to  March  1,  1913..         19 

Declared  payable  in.  securities 18,  58 

Life  insurance  companies 17 

Not  subject  to  normal  tax 9,18,134 

Received  by  corporations 58, 139 

Received  by  individuals 123, 139 

Received  by  partnerships 43, 138 

Stock  dividends   19 

Subject  to  additional  tax 130 

Doctors ;  fees  of 20 

Donations  (See  "Gifts"). 

Due  date: 

Return  of  corporations 46, 48 

Return  of   individuals 13 

Return,  when  last  day  falls  on  Sunday  or  legal  holiday. .        47 

Payment  of  tax  by  corporations 47, 48 

Payment  of  tax  by  individual 13, 139 

Duty ;  customs 102 

Duties  account   102 

Dwellings ;   depreciation  of 74 

Embezzlement ;    deduction   of 66 

Engines  and  boilers,  depreciation  of 76 

Entertainment  by  salesmen,  when  deductible 66 

Equipment  subject  to  depreciation: 

Laundry 79 

Miscellaneous   78 

Shop  78 

Stable 81 

Estates : 

Exemption  of  estates 25, 136 

Income  of  estates 20, 131 

Excess  deduction  at  source 35 

Exchange  of  stock 19 

Executors : 

Commissions    121 

Dividends  received  through  executors 122 

Returns  by  executors 11, 137 


INDEX  189 

Page 
Exempt  corporations  and  organizations : 

Classes  53 

Doubtful  as  to  exemption 56 

Foreign    56 

Must  withhold  at  source 55 

Exemptions;  specific: 

Claims  for   34, 140 

Certificate  of  34, 103, 140 

Corporation    (none    allowed) 46 

Estate    25, 136 

False  representations  in  claim 34, 140 

Individual    (personal)    9,  24, 136 

Non-resident,  alien   24, 136 

Prorating  exemption  between  husband  and  wife 11 

Ward,  cesui  que  trust 25, 136 

Expense  accounts ;  sundry 101 

Extension  of  time: 

Corporation    48 

Individual   13, 137 

Failure  to  file  return ;  penalties,  etc. : 

Compromises    13 

Corporations'    48 

Individuals' 13 

Failure  to  pay  tax ;  penalties,  etc. : 

Corporation    47 

Individual   14 

False  returns;  penalties,  etc.: 

Corporations    49 

Individuals   14 

Family ;  head  of,  exemption 24 

Family ;   head   of,   defined 24 

Farm: 

Books    of    account 41 

Buildings 75 

Deductions    allowed    farmer 39 

Depreciation  of   farm  property 40 

Income    39 

Maintained  for  recreation  only 41 

Federal  Corporation  Capital  Stock  Tax  Law  and  Regula- 
tions     161, 163 

Federal  Farm  Loan ;  interest  on,  exempt 19, 132 


190  INDEX 

Page 

Federal  Income  Tax  Law  (Sept.  8,  1916) 129 

Federal   Trade    Commission 68, 84 

Fees,  of  lawyers,  doctors,  etc. ;  when  returnable 20 

Fidelity  bond ;  premium  on 29 

Fiduciaries : 

Agents  are  not  fiduciaries 12 

Compensation  of   121 

Dividends  received  through 122 

Income  from  , 122 

Indemnity  to   131 

More  than  one  fiduciary 11 

Return  by 11, 137 

Final  returns   (see  "Tentative  Returns"). 

Fire  loss ;  treatment  of  account  of 105 

Fiscal  year  of  corporation: 

How  to  adopt  fiscal  year 47 

When  return  is  due  under  fiscal  year 46 

Foreign  corporations    (see  "Corporations,  Foreign"). 

Foreign  income: 

Tax  withheld  from  foreign  income 31, 142 

Foreigners  (see  "Aliens"). 

Forms : 
Application    for   deduction   of   tax   withheld   in   excess 

(1008,  Revised,  and  1088) 35 

Exemption  of  withholding  from  income  of  non-resident 

alien   corporations    (1086) 37 

Return  of  corporations  (1031,  Revised) 46 

Return  of  fiduciaries  (1041,  Revised) 11 

Return  of  individuals   (1040,  Revised) 10 

Return  of  insurance  companies  (1030,  Revised) 46 

Return  of  taxes  withheld   (1042,  Revised) 34, 37 

Freight  on  purchase 91 

Freight  on  sales 91, 101 

Fuel,  light  and  power 99 

Fund ;  reserve 70 

"  Fundamentals  of  a  cost-system  for  manufacturers  " 68 

Furniture  and  fixtures 70,  74 

Gas  wells: 

Depletion  of   27, 75 

Royalties    : 123 

Generators ;  depreciation  on  belted  generators 78 


INDEX  191 

Page 
Gifts : 

Bonuses    66 

Christmas  gifts  101 

Exempt    132 

Gratuities,  test  of  deductibility 101 

Income  from  gifts 21 

Good  will : 

Depreciation    81 

Treatment  of  account 81 

Government  bonds ;  income  from  Government  obligations 

not  taxable   19 

Gratuities  (see  "Gifts"). 

Gross  income: 

All  sources  57 

Business,  trade,  com'merce 122 

Contracting  corporations  57 

Insurance  companies    58 

Manufacturing    corporations 56,  90 

Mercantile  corporations  57 

Merchant  120 

Miscellaneous  corporations   57 

Guardians : 

Deduction  of  exemption  of  ward  or  cestui  que  trust 25 

Return  by  guardians II 

Head  of  family,  exemption 24 

Heat,  light  and  power  account 99 

Heirs  and  legatees ;  income  returnable 12 

Holding  companies ;  returns  of 51 

Holiday ;  when  due  date  falls  on 47 

Horses  ;  depreciation  of 81 

Horticultural  organizations   (exempt) 53 

Household  expenses ;  not  deductible 29 

How  to  adopt  fiscal  year  of  corporation 47,  4S 

Husband  and  wife : 

Exemption  of,  may  be  prorated 11 

Returns   by    11, 120 

Separate  income,  computing  additional  tax 11 

Specific  exemption  11 

Illustration ;  computing  normal  and  additional  tax 127 

Impairment  of  capital  account 109 


192  INDEX 

Page 
Improvements : 

Betterments    25, 28,  73 

Leased  property  73 

Local  benefits   65 

Not  deductible   134 

Repairs  73 

Income : 
Apportionment  of  income  for  1916  in  case  of  designated 

fiscal  year  of  corporation 50 

Appreciation  in  value  not  income 53 

Attorney's    fees    20 

Beneficiaries   131 

Qergymen    21 

Commissions  of  insurance  agents 21 

Corporations,  domestic    45, 143 

Corporations,  foreign   45, 148 

Deduction  from   (see  "Deductions"). 

Estates    20, 131 

Exempt  from  tax 132, 145 

Gross  income    (see  "Gross  Income"). 

Heirs  and  legatees 

In  trade  20 

Individuals  16, 130 

Installment  business  60 

Interest  (see  "Interest"). 

Money  equivalent    : 

Partnerships,  general  42 

Partnerships,  limited  44 

Promissory  note   20, 21 

Public  utility  145 

Real  estate  development  corporation 

Rents,  when  returnable 21 

Return  (see  "Returns"). 

Sale  of  stock  rights 19 

Subject  to  withholding 31,  33 

Sundry  sources 98, 123 

Incorporation    expenses    65 

Indebtedness ;    interest   bearing 109 

Indebtedness,  bonded ;  interest  paid  on 64 

Indemnity  to  withholding  party 37 

Information  required  to  prepare  return  of  mercantile  cor- 
poration           1 12 

Injuries ;  damages  received  on  account  of 18 


INDEX  193 

Page 
Instalment  businesses ;  what  constitutes  sales  in 60 

Insurance : 

Accident  18 

Account    101 

Agents   21 

Annuities   17 

Dividends 17 

Losses  not  compensated  for  by  insurance 26, 61, 124 

Partnership   43 

Premiums,  fire   29 

Premiums,  life   29 

Proceeds  of  policy  (exempt) 132 

Reserves  for  insurance 29 

Insurance  companies: 

Gross  income  of 58 

Mutual    ' 58 

Reserves    63 

Returns  of  46 

In  trade,  defined 26 

Interest : 

Accounts  93 

Accrued  on  bonds  bought 29 

Annuities   17 

Bank  deposits   36 

Bonds 64 

Collateral  subj  ect  of  sale,  etc 64 

Commercial   paper   of   corporations 33 

Cost  of  manufactures Ill 

Coupon    31, 141 

Debenture  bonds   95 

Deductible   by   individual. 25, 124 

Deductible  by  corporation 63 

Government  bonds    19, 93 

Limitation  of  interest  on  indebtedness 93, 147 

Preferred  stock   64 

Received  by  individuals 120 

Scrip  certificates 33 

Sinking  funds  59 

Tax-free  covenant  32 

Withholding  at  source  on  interest 31, 33 

Internal  Revenue  Officers  may  prepare  return 14 

Internal  Revenue  Officers  may  examine  books  of  taxpayer        87 


194 


INDEX 


Inventories : 

Account  91 

Depreciation  on   83 

Overstatement,  understatement  83 

Investments ;   depreciation   of 82 

Joint  fiduciaries 1 1 

Journal  entries  of  depreciation 69 

Joint  stock  companies  (see  "Corporations"). 

Judgments ;  test  of  deductibility  of 28 

Jurisdiction  of  District  Court 159 

Labor,  wages  and  commissions 98 

Land,  not  subject  to  depreciation 72 

Land ;  timber 75 

Last  day  to  file  return 13, 46 

Last  day;  when  last  day  falls  on  Sunday  or  legal  holiday.  47 

Laundry   equipment ;    depreciation   of 79 

Law;  Federal  Income  Tax  (Sept.  8,  1916) 129 

Lawyers'  fees ;  when  returnable 20 

Leased  property: 

Additions  to    73 

Permanent  buildings  erected  ??.y  tenant 74 

Leasehold  account 92 

Legatees ;  income  of,  returnable 12 

Liability  of  withholder  of  tax 34 

License  required  by  collecting  agents 32, 142 

Life  insurance  company  (see  "Insurance"). 

Limitations ;  statute  of,  when  removed 15 

Limited  partnerships: 

How  created   44 

Profits  of  44 

Returns,  etc 44 

Living  expenses,  not  deductible 25 

Local  benefits,   not  deductible 25, 65 

Losses : 
Bad  Debts  (see  "Debts,  bad"). 

Loss,  defined  26 

Deductible  by  corporation,  domestic 61 

Deductible  by  corporation,  foreign 67 

Deductible   by   individual 26, 124 

Deductible  by  non-resident  alien 30 

Deductible,  limitation  as  to  individuals 26,125 

Farms   and   farmers 40 


INDEX  195 


Losses: 

Fluctuation  .....  :  .....................................  82 

In  trade  ..............................................  26 

Speculations,  losses  in  .................................  26 

Machinery  ;  depreciation  of  ..............................  75,  76 

Mailing  returns  in  due  time  .......................  .  ......        47 

Manufacturing  corporation  : 
Cost-system    ..........................................  90,  110 

Gross  income  of  ......................................        56 

Market  value  ;  how  determined  ..........................        23 

Married  person  ;   exemption  of  ..........................        24 

Mercantile  corporation  : 
Information  required  to  prepare  return  of  ............       112 

Gross  income  of  .......................................        57 

Merchandise  : 
Account  .........  I  ....................................       109 

Allowances   ...............................  ............        89 

Purchases   ............................................        90 

Sales    .................................................        89 

Merchant  ;   return   of  ....................................       120 

Method  of  bookkeeping  : 
Corporations    .........................................  86,  88 

Individuals   ...........................................  88,  119 

Cost-system    ..........................................  90,  110 

Method  of  computing  tax,  normal  and  additional  ........       127 

Mines  ;   depletion  of  .....................................  62,  75 

Miscellaneous  corporations  ;  gross  income  of  .............         57 

Misrepresentation  by  omission  or  declaration  ............         86 

Money  equivalent  ;  income  received  in  ...................         20 

Mortgages  : 
Interest  on  mortgages  of  corporations  ............  .  .....        31 

Interest  on  mortgages  of  individuals  ..................       121 

Motors  ;  depreciation  of  .................................        78 

Municipalities  ;  interest  on  obligations  of  ................         19 

Mutual  insurance  ..................  .  ....................  58,  147 

Mutual  Benefit  Life  Ins.  Co.  vs.  Herold  ..................        74 

Middlesex  Banking  Co.  vs.  Eaton  .......................         96 

National  guardsmen  ;   salaries  of  ........................        66 

Negative  account   (note)  ................................        70 

Net  income,   defined: 

Corporations    .........................................  56,  143 

Individuals    ...........................................  16,  135 


196  INDEX 

Page 

Non-resident  citizen  required  to  make  return,  etc 12 

Non-resident  alien  : 

Deductions  of  29, 134, 135 

Exemption,   conditional 14, 24 

Return,  where  filed 13 

Withholding  from  income  of 37 

Nontaxable  income: 

Corporations    145 

Individuals   132 

Normal  tax  9, 129 

Notes ;  promissory : 

Equivalent  to  cash  receipts 20,  21, 121 

Interest  on  121 

Notice  of  assessment  by  collector : 

Corporation   

Individual   14 

Notice  to  collector: 

Corporation  adopting  fiscal  year 47 

Extension  of  time  13, 48 

Obligations  of  Government ;  interest  on 19, 132 

Office  equipment   

Officers'  salaries  100 

Oil  wells ;  depreciation  of 27,  75 

Ores;  depletion  of   (see  "Mines"). 

Organization  expenses  65 

Organizations  exempt   

Paid :  "  actually  paid  "  or  "  paid  during  the  year  " 88 

Partners : 

Credits  on  individual  returns  of 43 

Drawing  accounts  of 123 

Life  insurance  of 43 

Returns  of  42 

Salaries  of  123 

Partnerships : 

Dividends  received  by '. . . .  .43, 122, 138 

Exclusion  of  interest  on  state  obligations  in  return  of..  138 

Exclusion  of  taxes  in  return  of 138 

Expenses  of 43 

Income  of    42 

Limited  partnership,  taxable  as  corporation 43 

Not  required  to  make  return  unless  ordered 42,  138 


INDEX  197 

Page 
Partnerships : 

Not  subj  ect  to  withholding  tax  from  income 122 

Profits,  distributed  or  not 42, 122, 138 

Profits,  when  accrued  42 

Partnerships,  Limited: 

Make  returns  as  corporations 43 

Profits    44 

Patents : 

Depreciation  of 79 

Royalties  from   123 

Patterns ;  depreciation  of 79 

Penalties;  delayed  payment  of  tax: 

Corporations    47 

Individual   14 

Penalties  ;  failure  to  'file  return  : 

Corporations    48 

Individual 13 

Penalties : 

False  claim  for  exemption 34, 140 

False  or  fraudulent  return 14,  49 

Refused  or  neglected  to  file  return 13, 49 

Pensions : 

Received  from  United  States 21 

Paid  to  retired  employees 66 

Profit  and  loss   account 109 

Purchases    account    90 

Permanent  improvements    (see   "Improvements"). 

Personal  exemptions  10 

Philippine  Islands    159 

Piping,  steam ;  depreciation  of 78 

Place  of  business,  filing  returns  at: 

Corporations    (domestic  and  foreign) 46 

Individuals 13 

Non-resident  aliens  14 

Subsidiary  companies   52 

Political  campaign  expenses 29 

Porto  Rico  159 

Power,  fuel,  light,  etc 99 

Power  of  attorney ;  agent  acting  under 12 

Preferred  stock;  interest  on,  not  deductible 64 


198  INDEX 

Page 
Premiums : 

Bonds  purchased   65 

Fire  insurance 29 

Life  insurance 29 

Prepayments  :  treatment  of  prepayments  in  return 88 

President  of  United  States;  inspection  of  return  subject 

to  order  of 50 

Price :  Fair  market  price  or  value 23 

Professional  fees ;  when  returnable 20, 122 

Profit  and  loss  account 109 

Profit : 

Accumulation  of  profit  of  corporation 17 

Defined   24 

In  trade 20 

Sales  of  capital  assets,  taxable 

Profit  sharing  payments  subject  to  withholding  of  tax 36 

Promissory  note,  income 20,  21 

Property  acquired  prior  to  March  1,  1913: 
Computing  profit  or  loss  on 23,  59, 131, 144 

Property :  Restoring  property 28 

Prorating : 

Cost  of  improvements  by  tenant 73 

Exemption,  husband  and  wife 11 

Loss  on  sale  of  bonds 71 

Profit  or  loss  on  sale  of  capital  assets 23 

Public  Utility ;  income  from 145 

Public  records :  Returns  become  public  records 50 

Purchases : 

Merchandise 90 

Freight  on  purchases 91 

Railroad  company;  damages  received  from 18 

Ranches  (see  "Farms"). 

Rates  of  income  tax: 

Corporation   45, 143 

Individual    9, 10, 129 

Rates,  water  26 

Rates  of  depreciation 71,  72 

Real  estate  agents: 

Commissions  paid  to 29 

Not  required  to  withhold  tax 36 


INDEX  199 

Page 

Real  estate  companies : 

Accounts  of    59 

Anderson  vs.  Forty-two  Broadway  Co 64 

Development  corporations   59 

Property  collateral  of 64 

Rebates    90 

Receipts  for  taxes  paid 15, 157 

Receivers   (see  "  Fiduciaries  "). 

Redemption  of  bonds 64 

Refund ;  claims   for 15 

Refusal  to  file  (see  "Penalties"). 

Regulations,  Federal  Corporation  Capital  Stock  Tax  Law.  163 

Renewals  of  office  equipment 74 

Rent: 

Account  of    92 

Crop  shares  received  by  farmer k 39 

Interest  paid  in  lieu  of 94 

Real  estate  agent  collecting 36 

When  returnable  21, 122 

Withholding  tax  on 35 

Rental  value  as  income 20 

Rents :     Paid  and  received 92 

Repairs : 

Buildings   / 73 

Incidental   77 

Ordinary    99 

When  deductible   76 

Replacements ;  test  of  deductibility 76 

Reserves : 

Bad  debts  62 

Contingent   63 

Depreciation    69, 71 

Discounts  on  sales 63 

Diverting  reserves    70 

Insurance   , 29 

Insurance  companies 63 

Secret    63 

Separate  accounts  of  reserves 70 

Residence : 

Citizen  residing  abroad 12 

Resident  alien  15 

Residence,  defined  15 

Depreciation  of  dwelling 74 


200  INDEX 

Page 

Residing  in  the  United  States  temporarily 15 

Return : 

Defined   10 

By  agent 12 

Publicity  of  50 

Reconciliation  of  return  with  books  of  account 110 

Tentative   and  amended 51 

Verifying  by  Inspectors  of  Internal  Revenue 87 

Returns  of  corporations: 

Amended   51 

Books  of  account 53,  86 

Contents  of  return 112 

Delayed    48 

Extension  of  time  to  file 48 

Failure  to  file,  penalty 48 

False  or  fraudulent 49 

Form  of  return 46 

Holding  companies  51 

How  executed 47, 151 

Insurance  companies     46 

Interstate  Commerce   53 

Mercantile  corporations 112 

Refusal  to  file 49 

Suggestion  as  to  preparation  of 86 

Taxes  withheld  at  source 37 

Tentative 51 

When  due   46 

Where  filed  46 

When  Internal  Revenue  officer  will  prepare  return 49 

Returns  of  individuals : 

By  agent 12, 137, 141 

Books  of  account 119 

Delayed    13 

Extension  of  time  to  file 13, 137 

Fiduciaries   11, 137 

Form  of  return 

Failure  to  file,  penalty 

Extension  of  time  to  file 13, 137 

False  or  fraudulent 

Liability  of  agent  making  return 

Refusal  to  file 

Suggestions  as  to  preparation  of 

When  due   .  13,137 


INDEX  201 

Returns  of  individuals:  Page 

Where   filed    13, 137 

When  Internal  Revenue  officer  will  prepare 14 

Who  is  required  to  make  return 10 

Returns  of  exempt  organizations  : 

Return  of  tax  withheld 53 

Returns  of  non-resident  aliens 14 

Returns  of  general  partnerships: 

Not  required  unless   ordered 41 

Returns  of  limited  partnerships : 

Same  as  corporations 43 

"  Rights,"  sale  of 19 

Royalties  received  and  paid 92, 123 

Salaries : 

Based   on   stockholdings 100 

Bonuses  20 

Commissions 121 

Entries  of  salaries  in  return 119 

Exempt  corporations  must  withhold  tax  on  salaries  paid  55 

National  guardsmen   66 

Officers    100 

Paid  by  stock 20 

Paid  by  property 20 

When  returnable   20, 121 

Withholding  tax  from  payments  of  salary 102 

Sales : 

Capital  stock  sold  at  premium 60 

Instalment  businesses 60 

Profit  on  sales  of  capital  assets 22, 23,  59 

Real   estate   development   corporation 59 

Reserve  for  discounts  on  sales  of  commodities 63 

Freight   on   sales 91 

Sales   of   capital   assets 105 

Sales  account   (merchandise) 89 

Salesmen  paying  traveling  expenses;  employer  should  not 

withhold  tax   36 

Salvage  value  of  goods  returned 60 

Scrip  certificates ;  interest  on 33 

Second   assessments    50 

Secured  debts ;   interest  on 64 

Securities : 

Fair  market  value  of 23 

Dividends   paid   by 58 


202  INDEX 

Page 

Shafting ;  depreciation  of 78 

Shipwrecks ;  losses  by 124 

Sickness:  Extension  of  time  to  file  return  on  account  of, 

Corporations    48 

Individuals    13 

Sinking  fund ;  not  deductible 63 

Sinking  fund ;  interest  on,  is  income 59 

Source;  tax  payable  at 31,  33, 137 

Source ;  return  of  tax  withheld  at 37 

Specific  exemptions: 

Corporations  not  entitled  to 46 

Prorated  between  husband  and  wife 11 

Penalty  for  false  claim  of 34 

Who  is  entitled  to 24 

Stable  equipment ;  depreciation  of 81 

State : 

Defined  154 

Compensation  of  employees  of 132 

Interest  on  obligations  of 132 

Statute  of  limitations: 

Claims  for  refund  under  old 15 

Return  may  be  made  by  Internal  Revenue  Officer  within 

three  years 14 

Steam  Piping ;  depreciation  of 78 

Steam  turbines ;  depreciation  of 78 

Stock  assessment ;  payment  of,  not  deductible 29 

Stock  assessment ;  not  income  to  corporation 60 

Stock,  capital: 

Called  ^for  by  return 108 

Sales  of,  not  income 60 

Sales  of  right  to  subscribe  to 19 

Stock: 

Depreciation  of    82 

Dividends    19 

Exchange  of 19 

Interest  on  preferred 64 

Salary  paid  by 20 

Stock  on  hand ;  depreciation  of 83 

Stock  on  hand ;  account  of 91 

Stockholders'  responsibility  for  undivided  surplus 16 

Stockholder ;  return  of  capital  to 19 

Stocks  and  bonds ;  fluctuation  in  value 82 


INDEX  203 

Page 
Subsidiary  companies : 

Income  of    52 

Returns  of  52 

Where  to  file  returns  of 52 

Suggestions ;  bookkeeping    86 

Summons :   Collector  has  authority  to  summon  any  tax- 
payer or  other  person  in  connection  with  examinations 

by  him  156 

Sunday  or  legal  holiday;  last  filing  day  falling  on 47 

Sundry    expense    accounts 101 

Supertax  (see  "Additional  tax"). 
Surplus : 

Beyond  reasonable  needs  of  corporation 17 

Dividends   charged   to 110 

Surplus  account  109 

Undivided 16 

Surtax  (see  "Additional  tax"). 

Suspense   items   not   deductible 63 

Switchboards ;  depreciation  of 78 

"  System  of  accounts  of  retail  merchants  " 84 

Selden  vs.  Equitable  Trust  Co 97 

Tax  bills : 

Corporations    47 

Individuals 14 

Tax-free  covenant  in  bonds,  not  recognized 32 

Tax  on  corporations : 

Assessment,  notice  of 47 

Calendar  year   45 

Fiscal  year  47 

Claims  for  abatement  and  refund 15 

.Delayed  payment  of  tax,  penalty,  etc. . . . 47 

Income  tax  paid,  deductible 66 

Rate    45, 143 

Receipt  for  taxes  paid 15, 157 

When  due 47,48 

Tax  on  individuals : 

Assessment  of  tax 14 

Normal    9, 129 

Additional  tax 10, 129 

Calendar  year  10, 130 

Claims  for  tax  withheld  in  excess 35, 140 

Claims  for  abatement  and  refund 15 


204  INDEX 

Tax  on  individuals:  Page 

Delayed  payment  of,  penalty 14, 139 

Income  tax,  deductible 25 

Liability  of  withholder  of  tax 34 

Real  estate  agent  not  required  to  withhold 36 

Rates  of   9,10 

Tax-free    25 

Tax  year   10 

Who  is  subject  to  tax 9 

When  due    14,139 

Tax  exempt  income , 132 

When  50%  penalty  is  added 13 

Taxes : 

Accounts  of 107 

Accounts  of,  withheld  at  source 107, 108 

Deductible 25, 36, 124 

Entries  in  return  of  taxes  withheld 119 

Taxes  paid  by  tenant 65 

Withheld  at  source  over  $3,000 33 

Withheld  at  source  irrespective  of  amount  paid 31 

Computation  of  normal  and  additional  tax 127 

Tenant : 

Buildings   erected  by 74 

Improvements    made   by 73 

Taxes  paid  by 65 

Tenant  required  to  withhold  tax  on  rent  payable  to  in- 
dividuals in  excess  of  $3,000  per  annum 36 

Tentative   returns    51 

Theatrical  costumes ;   depreciation  of 82 

Three  year  limitation;  Collector  may  make  return  within.  14,49 

Timber  lands ;  depletion  of 62 

Tools ;    depreciation   of 78 

Trade :  "  In  trade,"  defined 26 

Income,  in  trade 20 

Losses,  in  trade 26 

Trademarks ;   depreciation   of 82 

Traveling  abroad;  extension  of  time 13 

Transportation  charges   91 

Treasury  Regulations ;  Corporation  Capital  Stock  Tax  Law  163 

Treasury  stock  108 

Trucks,  auto ;  depreciation  of 80 

Trustees : 

Compensation  of   21 

Returns  by  11 


INDEX  205 

Page 

Trusts  (see  "Fiduciaries"). 
Turbines ;  depreciation  of 78 

Undistributed  income : 

Of  corporations   16 

Of  estates 20 

Of  partnerships   42, 122 

Subj  ect  to  additional  tax 131 

United  States  vs.  The  Cleveland,  Gin.,  Chicago  &  St.  L.  Ry.  66 

United    States,    defined 154 

Verification  of  returns  of  corporations 47 

Vested  interest;  agent  required  to  report  distributed  and 

undistributed  income   12 

Voluntary  assessment  of  stockholders 60 

Wages,  labor  and  commissions * 98 

Water  rates  deductible  in  rented  property,  not  on  dwelling 

of  taxpayer   26 

Wages  (see  "Salaries"). 

Ward,  cestui  que  trust;  exemption  of 25, 136 

Withholding  corporation ;  return  of 103 

Withholding  tax: 

Commercial  paper   33 

Commissions  paid  to  salesmen. 36 

Exempt  organizations  required  to  withhold 55 

Income  of  non-resident  alien  corporation 37 

Indemnity  to  withholding  party 37 

Income  of  partnerships 41 

Income    from   rent 35 

Real  estate  agent  not  required  to  withhold 36 

Interest  on  bank  balances 36 

Return  of  taxes  withheld 37 

Taxes  withheld  in  excess  of  taxpayers'  liability  for  nor- 
mal taxes   35, 140, 141 

Withholding  party  personally  liable  for  taxes  required  to 

be  withheld 34 

Who  is  required  to  withhold  taxes 31,  33, 137, 139, 142 

Wires  and  cables ;  depreciation  of 78 

Worthless  accounts   receivable 103 

Worthless  stocks  and  bonds 82 

Year,  tax: 

Corporations    45, 47 

Individual  .  10, 130 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


AN  INITIAL  FINE  OF  25  CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  SO  CENTS  ON  THE  FOURTH 
DAY  AND  TO  $1.OO  ON  THE  SEVENTH  DAY 
OVERDUE. 


Tm 


JUH    Ic; 


. 

.«%*> 


1955 


JUNO  8  199} 


LD21-100m-7,'33 


YC  23476 
U.C.  BERKELEY  LIBRARIES 


COH43223flb 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


